Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report proposes the recommendations to County Council on the 2004/05 budget and the council tax, based on the budget guidelines approved on 15 December 2003. The proposals take account of the consideration of the guidelines by the relevant Policy Review Committees and Executive Members. The additional flexibility of £2m which had been added to the budget guidelines has been fully allocated to additional spending pressures.

1.2 The proposals are consistent with the budget strategy and budget consultation exercises during 2003 and result in a recommended council tax rise of just under 5% (equivalent to the 7% supported during consultation, after adjusting for the effect of the additional Government grant announced to relieve some of the burden on council tax payers). The current budget proposals meet the Minister's statements that:

· `the Government believe next year local authorities must aim to deliver council tax increases in low single figures'

· `now vital that councils meet the expectations of their tax payers and budget prudently to improve services at a reasonable cost'

1.3 The Minister appears to have written to all those authorities with Education and Social Services responsibilities which were reporting possible council tax rises of over 5% to warn that the Government `will not hesitate to use our capping powers if that proves necessary'. This does not apply to this County Council. Under the current capping regulations it will not be possible for Government to cap a large number of County Councils. In practice if a large proportion of councils have council tax rises of say between 5% - 7% they may not be capped in 2004/05 but instead be nominated for capping in 2005/06 (yellow carded).

1.4 The budget provides for:

· full passporting of the Schools Budget to meet the 4% per pupil minimum guarantee for each individual school, which provides for growth of 2.2% more than the base budget for schools, including £2.2m new resources to be allocated through the fair funding formula for deprivation factors in relevant schools. To achieve this it is proposed not to take account of the anticipated 2003/04 overspend on special education needs by adding £1m from balances to the 2004/05 Schools Budget, because of the Government's restrictions on central spending in the Schools Budget (the first submission to the DfES to allow the central spending to increase at a faster rate than the individual schools budget was unsuccessful; the results of the further submission are awaited)

· a total increase of £22.4m (8.5%) for Social Services which is £14.3 m (5.4%) more that its base budget, including additional non-ringfenced specific grants, which has been used to meet continuing and new pressures on all services (this takes the cumulative increase in Social Services spending over the four years from 2001/02 to 2004/05 to 51% - over four times the rate of inflation over that period)

· base budgets within budget guidelines for all other services as a starting point, together with an extra contingency of £3.8m for waste management to meet future commitments from volume changes, landfill tax increase and new infrastructure, offset by a grant of £0.3m to assist in financing waste management spending pressures.

· efficiency improvements mainly from absorbing increased costs of £5.0m

· annual review of charges and maximisation of income

· redeployment of £3.6m of resources which have been used to offset new and changed spending priorities, inescapable budget pressures, and legislative requirements which cannot otherwise be met within budget guidelines.

· allocation of £2m flexibility and other additional resources of £0.3m over base budgets for:

- extra costs in bus subsidies of £0.5m above inflation assumptions to maintain existing services, including Cango

- additional library opening hours and other proposals for Recreation and Heritage (£0.3m)

- costs of pay and benefits review team over next two years (£0.2m)

- development of short-term Cabinet priorities and accredited community support officers (£1.3m).

· £1.6m of balances have been earmarked for one-off investment in the Personnel and Training restructuring, to progress the pay and benefits review, to provide corporate resources for necessary investment in IT and to meet the E-government targets and to provide for further grants to voluntary organisations

· additional income from reduced council tax discounts on second homes is earmarked in partnership with the relevant district councils mainly to affordable housing schemes (£0.9m) and to local roads (£0.1m)

· £1m has been made as a contribution to the capital reserve

· another £1.5m of balances have been set aside to cover the risk and uncertainty of potential overspends in 2003/04, and for possible future one-off investment in 2004/05 or 2005/06, and £1.2m has been reserved for decisions yet to be finalised on central costs in schools

1.5 The final local government finance settlement has resulted in £1m more grant than the provisional settlement because of the incorporation of revised data for tax bases and capital financing. As there is a remaining unfunded gap in the capital programme it is proposed to make an offsetting £1m contribution to the capital reserve.

1.6 The overall position compared with 2003/04 (as adjusted for Fire becoming a precepting authority, flood protection being transferred to the Environment Agency and Social Services quality protects specific grant being transferred to revenue support grant) is summarised as follows:

Table 1: Overall summary of 2004/05 budget proposal

	2003/04 original	2003/04 adjusted	2004/05 provisional settlement	2004/05 final settlement	Increase over adjusted 2003/04
	£m	£m	£m	£m	%
FSS	994.6	957.9	1,007.5	1,008.2	5.3
Budget	1,032.1	993.9	1,048.0	1,052.3	5.9
Grant	628.0	610.0	645.9	646.8	6.0
Council tax	£844.56	£802.39	£840.15	£840.15	4.7

1.7 The increase in Formula Spending Shares (FSS) reflects the Government's spending plans for Education and Social Services. The increase is insufficient for other services, especially waste management cost increases, which is why the budget goes up by 5.9% compared with the FSS increase of 5.3%. Spending is £44.1m (4.4%) above FSS compared with 3.8% above FSS in 2003/04.

1.8 This is the first year, as far as historical trends go, in which Government grant has increased by more than FSS or the Council's budget. This reflects the Government's concern about the unsustainable nature of past council tax rises which has apparently led to extra grant to `deliver council tax increases in low single figures' for 2004/05.

1.9 However the extra grant (£340m nationally, £7.5m for the County Council) only appears to be one-off for 2004/05. If this is not continued into 2005/06, the council tax will rise by 2% next year before any spending increase.

1.10 The County Council lost £8m of grant in 2004/05 from the formula changes begun in 2003/04 for schools as compared with £21m in 2003/04. The County Council is now above the grant floor for all its services except for Education where £19m of damping grant remains to be lost in 2005/06 and most severely from 2006/07 onwards. On top of this the additional £7.5m temporary extra grant will need to be replaced. The budget strategy and three year budget plan is therefore designed to help offset a future potential grant loss of up to £26.5m. For this reason the grant equalisation reserve has been retained in full although it had been planned to use a proportional amount towards the formula grant loss in 2004/05.

1.11 The council tax rise at 4.7% is the lowest since council tax was introduced and the smallest increase in 20 years (the domestic rates increased by 3.5% in 1984/85). This shows that when Government provides an increase in grant support which is commensurate with its expectations of increased local authority spending it is possible for the County Council to deliver lower council tax rises, especially in the context of its three year prudential budget planning. This approach will need to be continued because of future likely changes.

1.12 The increase is £37.76 or £0.73 per week for the average Band D council tax payer. However because the Fire Authority is a precepting body from 1 April 2004, the County Council's council tax on the bill will appear to have reduced by £4.41 (0.5%). It is anticipated that the overall council tax bill (including the Fire and Police Authorities, as well as the district council and County Council) will go up by about 6%.

1.13 Despite having the fifth lowest grant increase of all counties, it is anticipated that the County Council's council tax rise will also be one of the lowest and that the actual council tax amount will be within (or close to) the (corporate strategy) target of being in the lower quartile.

1.14 Section 25 of the Local Government Act now requires the County Treasurer to report to the full Council on the:

· robustness of the estimates for 2004/05

· adequacy of the financial reserves in the budget.

1.15 This draws from past reports during the budget process, and particularly the paragraphs in this report which deal with performance management, risk management, balances, reserves, three year budget plan, financial management policy, treasury management strategy and the prudential code for borrowing (another new requirement under the same Act which also has to be reported to full Council).

1.16 The Budget report consists of the following sections:

· revised estimates 2003/04 (paragraph 2)

· final local government finance settlement 2004/05 (paragraph 3)

· 2004/05 base budget (paragraph 4)

· budget guidelines, redeployment of resources and issues arising (paragraph 5)

· efficiency savings (paragraph 6)

· annual review of charges and maximisation of income (paragraph 7)

· reduced council tax discounts on second homes (paragraph 8)

· additional resources (paragraph 9)

· additional budget allocations (paragraph 10)

· performance management (paragraph 11)

· risk management (paragraph 12)

· balances (paragraph 13)

· earmarked reserves (paragraph 14)

· overall budget proposals (paragraph 15)

· three year budget plan (paragraph 16)

· treasury management strategy (paragraph 17)

· prudential code for borrowing purposes (paragraph 18)

· Local Government Act 2003, Section 25 Statement (paragraph 19).

2. 2003/04 Revised estimates

2.1 There is no formal revised estimate review as budgets are monitored during the year and changes reported as they occur. All services are controlling estimates to their cash limits for 2003/04 with a risk of year end overspends on Education and Social Services which would normally be carried forward and recovered from cash limits in 2004/05. Both services have provisionally set aside contingencies for this purpose.

Education

2.2 A potential overspending of £2.4m, mainly on special education needs, was reported to Cabinet in October. The Cabinet noted this potential addition to balances from savings on non-service budgets which could be used to meet any cost over-run in 2003/04. The current projected overspend has now reduced to £1m, and could be lower still at the year end.

Environment

2.3 It is proposed to reallocate savings of £350,000 on the capital structural maintenance programme to the highways revenue maintenance budget. Approval is also sought to carry forward to 2004/05

· planned savings on management and support services of £100,000

· anticipated underspending of £311,000 on the waste management budget for the disposal of abandoned vehicles. It is suggested that this carry forward is ring-fenced for the cost of disposal of abandoned vehicles, refrigerators and other electrical or battery components in 2004/05.

Policy and Resources

2.4 A projected overspend of £117,000 is expected to be offset by savings emerging prior to the year end; including a further unquantified reduction in the external audit fee because of the removal of ringfencing from many specific grants.

Recreation and Heritage

2.5 The main pressures continue to be:

· the transitional cost of the library review

· Milestones and the museums service

2.6 Planned action is in place to eliminate any potential overspend by the end of the year.

2.7 £133,000 has been transferred from the revenue budget to fund part of the cost of the proposed new accommodation block at Calshot.

Social Services

2.8 A potential overspend of about £2.4m was identified for 2003/04 last November, in line with similar trends over previous years. Corrective action has been planned to help meet the increased demand for services, particularly on children and families services. The current projection is for an overspend of £0.8m, which can be offset in part by a transfer of £0.5m from capital to revenue. The remaining potential overspend of around £0.3m would be carried forward and set against the contingency of £1.5m included in the 2004/05 budget to meet any potential overspend and to provide further capacity to absorb any further demands or cost pressures on children's services.

2003/04 carry forwards

2.9 Proposals are made later in this report to deal with final overspends on Education and Social Services, provided that management action is taken over the remainder of the year to manage the budget within the cash limit. Approval is required to carry forward savings in Environment. There are no other proposals to carry forward savings, so that any further savings that do occur will accrue in accordance with the agreed budget policy of 50% to the service and 50% to corporate balances.

Table 2: Planned savings from 2003/04 to be carried forward and used to meet additional pressures in 2004/05

Environment	£'000
non-ringfenced	100
ringfenced for excess costs of disposing of vehicle, refrigerators and electrical goods	311
	411

Other budgets

2.10 The Hampshire Fire and Rescue Authority has notified an increase in its supplementary levy for 2003/04 which is in total £784,000, to meet additional members allowances, the integrated risk management plan and predominantly the costs of the firefighters' pay award of £612,000. In addition retained firefighter's operational activity is likely to add a further £202,000 at the year end. This Council's share is about £786,000, more than the estimate of £500,000 originally provided.

2.11 Capital financing costs will also increase because of higher minimum revenue provision in 2003/04 as a result of higher borrowing in 2002/03 than originally budgeted.

2.12 These costs are offset by continued interest rate savings (base rate has remained at 3.75%) and anticipated higher interest on revenue balances.

2.13 The overall effect is a further potential addition of £0.5m to balances at the year end as set out below, as compared with the previous monitoring report in October.

Table 3: Variation on other budgets

	£m	£m
Increased supplementary Fire levy		0.3
Capital financing costs higher revenue repayment savings on interest rates	0.6 -0.4	0.2
Other savings against inflation contingency		-0.1
More interest on revenue balances		-0.9
Total addition to balances		-0.5

2.14 The adjustments to the overall 2003/04 cash limit, comparisons of the revised estimates with the cash limit and an analysis of the major variations in spending projected in 2003/04 are set out in Appendix 2.

3. 2003/04 Local Government Finance Settlement

3.1 Details of the provisional settlement and the revised additional grant were reported in December 2003. Cabinet will have received a copy of the letter sent in response to the consultation on the revised settlement, based on discussion at that meeting. No response has been received.

3.2 The final settlement was announced on 29 January 2004 and details are shown in Appendix 1. The main change from the revised provisional settlement (which includes the extra £340m grant nationally) is an addition of the grant for Magistrates Courts which has increased by 12.8%. There are number of smaller changes which include national additions to the EPCS and capital financing FSS blocks as well as the usual final data changes. The Government is therefore saying that the total grant increase for 2004/05 is 7.3%. Hampshire's overall increase, including specific grants, is 7.7% by comparison (the revenue support grant increase is 6%). The grant increase is large in historical terms.

Final grant

3.3 Hampshire's grant in the final settlement has increased overall by a further £1m: about £0.7m from the increase in FSS, mainly on capital financing (£0.5m); and about £0.3m because Hampshire's share of the national tax base has reduced marginally compared with the Government's original assumptions.

Grant loss

3.4 £21m of grant was lost in 2003/04 and a further £8m in 2004/05. This was partly offset by £7.5m extra grant to keep council tax rises in low single figures but for 2004/05 only. A further £19m of grant is still due to be lost from existing Education damping. Total potential grant loss is therefore £26.5m.

Capping

3.5 The Minister has written to councils which have publicised potential council tax rises in excess of 5% saying that `Government has made very clear its view that given the significant investment in local services, and the scope for efficiency improvements, authorities can and should deliver council tax rises in low single figures in 2004/05. We will be looking very closely at final budgets and council tax rises for next year, and we will not hesitate to use our capping powers if that proves necessary'. The County Council's proposed 4.7% council tax rise escaped the warning.

Final figures

3.6 The final figures compared with the revised settlement are as follows:

Table 4: Final settlement figures 2004/05

	2003/04 Adjusted figures	December revised settlement	January final settlement
	£m	£m	£m
Government grant	290.0	332.1	332.9
Non domestic rates	320.0	313.8	313.9
Revenue support grant	610.0	645.9	646.8
Council tax payer	347.9	361.6	361.4
Formula Spending Share	957.9	1,007.5	1,008.2

4. 2004/05 base budget

4.1 budget guidelines were set at the last meeting to prepare base budgets with additions for:

· passporting requirement to schools

· increase in Social Services cash limit in line with the FSS increase

· extra contingency for waste management

4.2 Pay and price inflation was assumed as 2.5%.

4.3 The adjusted base budget is £1,022m, an increase of 2.8%. This represents the continuation of the current financial policies of the County Council.

4.4 Details of the construction of the base budget, for services and for other budgets are set out in Appendix 3. The details of significant variations in service spending are contained in Annexes 1-5 of Appendix 3, as reported to Policy Review Committees and as submitted by Executive Members to Cabinet within the budget guidelines.

4.5 The final base budget differs from the provisional base budget by just £0.1m, mainly because of:

Table 5: Final base budget

		£m
·	adjustment to interest rate assumption	-0.4
·	amended calculation of addition above base budget required to passport schools FSS increase	0.3
		-0.1

5. Budget guidelines

5.1 Budgets have been submitted within the guidelines, as summarised below.

Table 6: Budget guidelines - total service cash increases 2004/05

* comprise capital/revenue transfers, carry forwards of over and underspendings, and variations on specific grant

5.2 All Executive Members were also asked to meet all inescapable budget pressures and legislative requirements within the budget guidelines cash limits for their services, with proposals for redeployment of resources to offset any new spending priorities.

5.3 Total redeployments of £3.5m have been identified as summarised below.

Table 7: Summary of redeployment of resources for 2004/05

	£'000
Education	35
Environment	2,566
Policy and Resources	65
Recreation and Heritage	915
Social Services	-
	3,581

5.4 Appendix 4 summarises all the proposals for new growth within the budget guidelines for the passported amounts for Education, Social Services and Policy and Resources, together with the proposals for redeployment within the guidelines summarised in Table 7.

Education

5.5 As agreed at the last meeting the Secretary of State for Education was notified of the County Council's intention to passport fully the increase in the Schools Budget for 2004/05. This was approved and the Cabinet also agreed not to `over passport' the increase by putting an extra burden on the council taxpayer, having already had to do so in 2003/04 to replace lost Government funding.

5.6 The Education Executive Member has consulted the Schools Forum and the Secretary of State on:

· using the flexibility within the headroom remaining above the minimum per pupil guarantee in the Schools Budget. This amounts to £1.8m. It has been used to meet the average cost pressures on all schools of 3.4% (£0.7m) and to provide new funding for schools serving deprived areas (£1.1m)

· seeking exemption from the capping on central spending (that is on SEN and excluded pupils) which is part of the Schools Budget. The Secretary of State will not allow this part of the budget to increase at a faster rate than the individual schools budget (ISB) which is the budget delegated to schools. Progress is reviewed below.

· maximising the full use of the targeted transitional grant of £6.9m for schools in financial difficulties. Good progress has been made in meeting the detailed prescriptive criteria for this application and the Secretary of State is expected to approve the plan in full.

5.7 An application was made for an increase of £2.4m in the central spending limit from £1.4m to £3.8m. This was rejected, as have all other bids by other authorities. There are issues around the definition of the calculation of the central spending application but this does not affect the overall budget or the headroom within the ISB, as it is just a redefinition of the capping limit to take account of the under-fives budget increase.

5.8 To progress this further it is proposed to resubmit an application for a reduced sum of £1.2m. There is a potential risk that if this reduced application is rejected then the Council will have to increase the budget for central schools costs by a sum of between £0.3m to £1.2m (depending on the definition of the calculation involved and the sum agreed by the DfES). The amount of delegated schools budgets would increase by a similar amount. The results of the application should be available for the Cabinet meeting, so that final decisions can be taken as appropriate.

5.9 The reduced application could be facilitated by not taking account of the anticipated 2003/04 overspend on SEN in setting the 2004/05 budget. This currently amounts to about £1m. This would mean covering the projected overspend from balances in 2003/04. However the decision to write off the overspend can be taken at the end of the year, depending upon how successful the new application is (in full or in part), and on the basis that Education will continue to manage its spending down to the cash limit for 2003/04 (which does not allow for the ring fencing of savings on the youth service and early years being used for capital purposes).

5.10 The exclusion of the requirement to provide for the 2003/04 overspend in the 2004/05 budget also releases a further £1m to the headroom within the ISB. It is proposed that this be allocated to increase the funding for schools in deprived areas which takes the total new funding for this purpose to £2.2m in 2004/05 - the sum recommended by the review group and the Schools Forum. This growth meets two of the Cabinet's short-term priorities within the corporate strategy to assist youth; tackling crime and deprivation, and to improve Education and skills.

Environment

5.11 It is proposed to redeploy £1.2m from the capital maintenance programme to meet spending pressures. A revised highways maintenance programme has been approved taking this and other changes into account. £0.7m has been allocated to new pressures and £0.5m towards the continuing effects of pressures on the revenue highways maintenance budget. A further £0.6m has also been redeployed to meet new pressures and growth affecting transport policy, taking the total redeployment from capital to revenue to £1.8m. The reduction in locally resourced spending on capital maintenance has been compensated for by an equivalent adjustment to the use of Government approvals (£1.8m) to finance maintenance spending rather than integrated transport measures. Full details are shown in Appendix 4.

5.12 The £0.5m budget pressure from the public transport contract retendering, maintaining Cango services, the rural transport partnership and community transport has been confirmed.

5.13 The County Council has also been awarded a further £0.8m over a number of years in the 2003 Rural Bus Challenge Competition - a wide range of projects throughout rural England, "helping to improve transport choice and access to essential services and facilities". Details are still awaited and this has not yet been added to the budget. Although this funding is anticipated for a number of years it will put an additional strain on the Council's future budgets unless plans are made to assimilate these extra services within the existing public transport budget when the grant funding expires.

5.14 In setting budget guidelines the Cabinet agreed to continue the £3.5m sum set aside in the 2003/04 budget for one year only, subject to review, to improve the condition of and maintenance of local roads and pavements. It was suggested that £0.5m should be allocated to meet the additional cost of bus subsidies, leaving £3m for a further year of improvement, again subject to a further review of improved performance before setting the 2005/06 budget. In practice the full sum of £3.5m has been retained leaving the new growth of £0.5m on public transport to be met by the re-prioritisation of the public transport budget. There is of course a case for the other redeployment measures identified to be used first to meet this additional cost rather than find savings elsewhere in the public transport base budget.

5.15 Other redeployment savings include the elimination of the historical buildings grants and a condition of this should be that future grant applications for historic buildings are not redirected to the grants to voluntary organisations budget in Policy and Resources.

Policy and Resources

5.16 The base budget has been reduced by the first part year savings of £450,000 from the SAP benefits realisation. In addition potential procurement savings of up to £250,000 will be achieved by reducing the relevant non-schools budgets across all services. Benefit realisation on human resources will not be achieved in full until after the delayed completion of the Personnel and Training restructuring but planned savings of £100,000 on advertising, linked to the setting up of the recruitment centre will start in 2004/05. The SAP savings for 2004/05 total £800,000 and are applied to reduce revenue contributions to capital in order to repay the invest to save project in the capital programme.

5.17 The budget guidelines allocate Policy and Resources its proportional share of the extra cash increase for Schools and Social Services. The Schools amount of £0.6m has been allocated to repairs and maintenance of Schools for additional inflationary costs.. The Social Services amount of £0.5m has been used to enhance occupational health services (Social Services having the biggest scope for cash savings from reduced sickness), extra office accommodation costs, development of electronic modern records capacity and for additional pressures on central services in support of Social Services. Again details are shown in Appendix 4.

Recreation and Heritage

5.18 £400,000 has been redeployed to the countryside services to meet the obligations of the Countryside and Rights of Way (CRoW) Act and to provide greater access to the benefits of countryside recreation. £300,000 will be transferred from Recreation and Heritage's policy fund (this includes £180,000 added to the 2003/04 budget for the CRoW Act) and £100,000 by other redeployments within the countryside service budget.

5.19 A further £515,000 (of which £215,000 is met from the policy fund and £265,000 from within the libraries and information budget) has been redeployed to meet the transitional costs associated with early retirements and salary protection arising from the library and information service reorganisation. It is anticipated that these amounts can be redirected towards progressive improvements in library opening hours in future years as the reorganisation costs taper away.

Social Services

5.20 In setting its budget guidelines the Cabinet agreed to increase the Social Services cash limit in line with the increase in the Social Services FSS cash increase. The Executive member was asked to report back to Cabinet on the use of this cash increase and additional non-ringfenced specific grants: to meet the priority pressures on elderly and children's services; to retain two star status; and on the anticipated improved performance and outcomes from the increased investment.

5.21 The total increase in the Social Services budget for 2004/05 is £22.4m (8.5%). For comparison purposes, this increase alone is 80% of the total Recreation and Heritage budget for 2004/05. The increase allows for £14.3m (5.4%) growth above the base budget. (£9.8m from the cash increase in FSS and £4.5m from the net increase in non-ringfenced specific grants). This brings the total increase in the Social Services budget over the four year period from 2001/02 to 2004/05 to 51%, over four times the rate of inflation.

5.22 The growth of £14.3m above the base budget has been allocated as follows, showing the percentage growth for each service.

Table 8: Summary of growth for Social Services

	£m	Increase %
Contingency	1.5
Children and families	3.6	6.7
Older people	5.8	5.6
Adults	2.8	3.7
Management and support	0.8
Additional income	-0.2
Total growth	14.3

5.23 The biggest percentage increase is on children and families and this provides for all the continuing placement pressures from 2003/04, anticipated price increases above corporate inflation assumptions and extra legal support. A total of 825 children in care are budgeted for compared with 753 in the 2003/04 budget.

5.24 The £5.8m growth for older people is on top of the two extra £3.5m sums provided in the 2003/04 budget for domiciliary care and to reduce delayed discharges from hospitals. These have been subject of business plans and the improvement in performance has been monitored and reported during the year. The extra resources of £5.8m in 2004/05 will have a full year effect of £8m which will need to be contained as a first priority within Social Services cash limit increase next year.

5.25 The 2004/05 growth provides more resources to minimise delayed transfers of care from hospital (£1m), meeting new national minimum standards for staffing levels within homes (£0.4m), meeting demand for residential and nursing care (£1.5m), helping people to live at home (£2m) and price increases above corporate assumptions (£0.9m).

5.26 The extra 3.7% for adults is mainly to cover a net increase in the number of adults receiving care (£2m) as well as higher price rises and some improvements in the integrated community equipment service and sensory services and carers support.

5.27 The management and support rise covers staff recruitment and training costs, and IT costs. The contingency will be retained to meet unbudgeted pressures that arise in 2004/05, particularly on children's services, and to repay any net overspend accrued in 2003/04, currently projected at around £0.8m.

5.28 Social Services has not proposed any redeployment of resources from lower to higher priorities.

6. Efficiency improvements

6.1 No cuts in services have been made, but an overall efficiency improvement of £5.0m (0.5%) is proposed. Details as shown in Appendix 5 and summarised below.

6.2 The savings arise from the absorption of salary increments (£3.7m), the first phase of SAP benefit realisation savings of £0.8m, which are cash-backed, and £0.2m from absorption of increased IT 2000 roll-out costs to smaller sites in Recreation and Heritage.

Table 9: Efficiency improvements

	£m
Education	2.2
Environment	0.5
Policy and Resources - SAP benefits realisation - Other	0.5 0.6
Recreation and Heritage	0.5
Social Services	0.4
SAP benefits realisation - to be allocated	0.3
	5.0

7. Annual review of charges and maximisation of income

7.1 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 in policy and financial terms.

7.2 Details of income reviews and charges made are set out in Appendix 6 and in Summary below:

Table 10: Summary of income from fees and charges

	Mandatory charges	Discretionary charges	Total
	£m	£m	£m
Education	2.1	1.1	3.2
Environment	0.2	5.6	5.8
Policy and Resources	0.1	6.2	6.3
Recreation and Heritage	-	7.0	7.0
Social Services	34.8	8.2	43.0
	37.2	28.1	65.3

8. Council tax discounts on second homes

8.1 Progress has been made in developing the proposed protocol on maximising the potential resources available from the change in the Local Government Act 2003 which allows the district councils to reduce the council tax discount on second homes from 50% to a minimum of 10% for 2004/05.

8.2 Six districts have agreed to reduce the discount to 10% in 2004/05 as follows:

Table 11: Reduction in council tax discounts on second homes

	Extra income to the County Council £'000
East Hampshire	158
Eastleigh	59
Fareham	97
New Forest	571
Test Valley	156
Winchester	119
	1,160

8.3 The County Council's share is therefore about £1.1m and this can be pooled with the relevant district councils own share of about £168,000. The Leader has met the Leaders of East Hants, New Forest, Test Valley and Winchester to progress the protocol. It has been agreed that the additional income would be ringfenced within each district area to be spent on affordable housing schemes in partnership with the district councils and subject to nomination rights for the County Council's employees in proportion to the income raised. The County Council also agreed to contribute towards any actual additional costs incurred by district councils in reducing the discount.

8.4 A further round-table session will be arranged with all the district councils to draw up the necessary agreements, subject to clarification of the legality of the County Council contributing to affordable housing schemes with a private equity stake in partnership with the relevant district council and housing association.

8.5 The outline agreement for use on affordable housing schemes accords with the fourth short-term Cabinet priority within the corporate strategy of improving affordable housing and will also assist with the recruitment and retention of staff. Fareham wishes to use its share of the income on local roads, and the County Council will propose using 50% of the income from Test Valley towards the short-term Cabinet priority on young people; crime and deprivation to be subject to a pilot scheme in Andover.

9. Additional resources

9.1 Executive members have redeployed existing resources of £3.6m to meet new higher priority pressures, (Table 7) and efficiency improvements of a further £5.0m (Table 9) have also been achieved.

9.2 £2m was built in to the budget guidelines for final flexibility in setting the budget. Table 5 identified an extra £0.1m from adjustments to the final base budget. Extra grant in the final settlement amounts to £1m (paragraph 3.3) and there is also an increase of £0.7m in the net tax base notified by the billing authorities in January, together with additional income of £1.1m from the reduction in the council tax discount on second homes.

9.3 There is more council tax income in 2004/05 only from the reduction in discounts for empty properties (from 2005/06 that income is redistributed within the grant tax base calculations) and a higher surplus on collection funds then originally estimated.

9.4 There is also a new targeted recycling grant from the Department for Environment, Food and Rural Affairs (DEFRA) to reduce some of the spending pressures on waste management in 2004/05. It is therefore appropriate to use this to reduce the cost of the waste management contingency. DEFRA has also delayed the start of the landfill allowance trading scheme by one year to 2005 enabling local authorities to save by deferring investment in waste management options that divert waste from landfill. A waste management performance reward grant will be introduced in 2005/06 to provide local authorities with incentives to improve their waste management performance through high rates of recycling and composting of household waste. Although these initiatives help to finance waste costs there still needs to be a greater recognition by Government of the cost increases in waste management in FSS, preferably through a new separate block, and the particular circumstances of the County Council's contract concluded in advance of the PFI credits available for later schemes.

9.5 Surplus balances are also available for one-off investment as illustrated next:

Table 12: Estimated additional balances at 31 March 2004

	£m
Estimated balances at 31 March 2003 assumed in 2003/04 budget	7.9
Adjustment on closure of 2002/03 accounts (saving of £0.2m matched by additional grants to voluntary organisations in 2003/04)	-
Variations reported in October 2003 budget monitoring report (interest rates on balances and lower interest rates during 2003/04)	1.7
Transfer of share of balances to Hampshire Fire and Rescue Authority on 1 April 2004, equivalent to 1.2% of 2003/04 budget requirement	-0.5
Further potential savings in 2003/04 revised budget
- more interest on higher balances	0.9
- increased assessment of interest rate saving as base rates not increased further	0.4

- higher minimum revenue provision in 2003/04 as a result of higher borrowing in 2002/03 then budgeted	-0.6
- higher estimated HFRA supplementary levy in 2003/04	-0.2
	9.6
Less minimum level of balances (0.6% of budget)	-6.3
Potential scope for use of balances on a one-off basis in either 2004/05 or 2005/06	3.3

9.6 The overall effect of all these changes is to provide extra resources of £4.9m on a continuing basis, and £4.7m on a one-off basis, summarised in the next table.

Table 13: Additional resources available

10. Proposed allocation of additional resources

10.1 The proposed allocations in this section of the report take account of:

· pressures and new demands identified during the Autumn budget meetings between the Leader and Executive Members

· Leader's priorities for allocation

· the review of budgets by Executive Members and Policy and Review Committees during January

· areas identified in the budget guidelines report which required one-off investment

· clear links to the four short-term Cabinet priorities within the overall corporate strategy

- young people; crime and deprivation

- education and skills

- older people

- transportation (mobility and accessibility) and affordable housing

10.2 The first requirement is to add £1m to the Schools Budget to cover central school costs because of the Government's restriction on central spending increases. This removes the carry forward of the projected 2003/04 overspend into the 2004/05 Schools Budget, but the final decision on the actual write off in 2003/04 will be taken when the 2003/04 accounts are closed (see paragraph 5.9).

10.3 There is also a need to provide for the remaining central costs on Education if the new application is refused by the DfES. This may require a sum of between £0.3m and £1.2m on a contingency basis, depending upon the decision made and definitions used (see paragraph 5.8). If the contingency is not required for this purpose part or all of the contingency remaining could alternatively be used as a contribution toward the costs of implementing the pay and benefits review later in 2004/05 or into 2005/06. The Leader also proposes to make available a small proportion to assist the music service.

10.4 There is an overall shortfall of £2.5m in the capital programme (in 2005/06 and 2006/07). Whilst this is relatively small in the context of a four year capital programme of £645m, it is proposed to make a contribution to the capital reserve to avoid additional revenue contributions to capital, or deletions from the capital programme to compensate, when setting the 2005/06 budget. This reflects the extra grant received for capital financing. There remains a shortfall of £1.5m in the 2006/07 capital programme, as explained in the separate report.

10.5 The additional income from the reduction of the council tax discount on second homes will be earmarked in a contingency for affordable housing schemes, with nomination rights for County Council employees, in East Hampshire, New Forest and Winchester. It is proposed to agree with Test Valley that 50% of the income in that area is used similarly for affordable housing, with the other half being earmarked for young people; crime and deprivation measures in Andover. This could include weekend and evening bus services for young people, an extra youth worker, the extension of the neighbourhood warden schemes and modern apprenticeships. The income from Fareham will also be held in a contingency towards agreed schemes for the improvement of local roads. Further reports on these initiatives will be required.

10.6 The Leader and Cabinet proposes to allocate the £2m flexibility built into the budget guidelines for the following purposes:

· provide an additional £0.5m to offset the proposed changes in priorities within the public transport budget to allow the continuation of Cango and other existing public transport subsidies. However this would be conditional upon Environment having a plan to redirect priorities within the existing public transport cash limit when the funding from the 2003 rural bus challenge expires (paragraphs 5.12 - 5.14)

· meet additional commitments on Policy and Resources of £0.2m for the next two years only to provide designated personnel staffing resources to complete and implement the pay and benefits review

· to set aside £0.3m for improvements in library opening hours and other new initiatives in Recreation and Heritage

· to allocate £1m towards the development of accredited community support officers, and community safety and regeneration projects in deprived areas of the county. Up to 40-45 community support officers could be employed in a full year by the County Council but would be accredited by Hampshire Police for community and other patrol duties in the Hampshire County area. A further report will be made to Cabinet on the development of the scheme.

10.7 It is therefore proposed to hold all these proposals in a contingency for the Leader to determine their release against:

· additional reports on the business case and the expected improvements in performance against the short-term priorities in the corporate strategy

10.8 Further contingency allocations, with similar requirements for a business case and performance improvements to be agreed as set out in paragraph 10.7, for:

· other short-term Cabinet priorities, to be allocated by the Leader, including the development of modern apprenticeship schemes

· extra resources for grants to voluntary organisations, including proposals to develop an exit strategy in funding Intech over the next three years, to provide for a regeneration project at Wecock youth and community centre, to replace the resources required for community safety audits, consider a subscription to Localis, support the development of Quality Parishes and maintain a County Council presence at county shows

10.9 The December Cabinet report drew attention to a mixture of new one-off and continuing corporate pressures which would need to be resolved when details were clearer before the final budget is set. These included:

· costs of restructuring personnel and training

· initial set up costs of a new recruitment centre and to ensure the delivery of the SAP benefits realisation plans for human resources

· further work on the pay and benefits review

· expansion of occupational health to secure reductions in long-term sickness, principally in Social Services

· additional capacity for modern records to deal with electronic records and the Freedom of Information Act

· necessary one-off investment in E-government to ensure the Government targets are met in 2005.

10.10 The expansion of occupational health and extra capacity for modern records has been covered by the use of the passporting flexibility within Policy and Resources budget guidelines (paragraph 5.17) and by proposed contributions from service departments.

10.11 Contingencies will be provided for the other one-off investment proposals, again subject to further reports to the Leader on the business case and improved performance expected as follows:

· transitional staffing costs in restructuring Personnel and Training and setting up a recruitment centre (£0.2m)

· one-off costs of up to £0.3m in restructuring Personnel and Training (new telephone call system, contact management and other IT and set up costs)

· further one-off costs on pay and benefits (£0.1m), including the reconfiguration of SAP for the new role profiles, pay scales etc (£0.2m)

· E-Government systems including £0.3m for a business warehouse (to improve speed and quality of reporting across all systems as mainframe systems are removed), £0.1m for a new BVPI system and to receive income over the internet and £0.1m for other E-Government targets.

10.12 This further investment in Personnel and Training is conditional upon reductions in cash limits for the service to achieve SAP benefit realisation savings from 2005/06 onwards and the full year savings of £0.7m by 2007/08.

10.13 A contingency of £1.5m has been set aside in the Social Services budget to cover the risk of an overspend in 2003/04 and new pressures, especially for children's services in future years. Some additional balances need to be retained corporately in 2003/04 to cover the risk of overspends on both Education and Social Services. It is also proposed to set aside a further central contingency to be allocated by the Leader against a targeted business plan for improvements in children's services over the next three years, but to be `pump-primed' on a one-off basis in 2004/05 only. Further corporate provision will be set aside for any required consultancy or start-up costs arising from `Every Child Matters' which may fall due in 2004/05, but cannot be quantified at this stage in setting the budget.

10.14 Finally it is proposed to hold a small sum in addition to the minimum level of balances to aid the budget position in 2005/06. This represents about 20% of the surplus balance at the end of 2002/03 that was carried forward to meet uncertainties in the 2004/05 budget.

10.15 With the exception of the £1m addition for the Schools budget and the capital reserve it is proposed to hold all these extra allocations in contingencies because:

· precise amounts in many cases are not yet certain or specific (eg costs of restructuring Personnel and Training)

· some allocations require more definition on how the money will be spent and the precise outcomes expected (eg Recreation and Heritage)

· other sums are subject to agreement with external partners (eg affordable housing)

· some sums may only have a part year impact in practice because of the lead-in time required to set the scheme up (accredited community support officers)

10.16 These proposed allocations can therefore be split between:

· one-off investment and contingency budget additions

· sums allocated to service cash limits and held centrally in contingency for the Leader to allocate against business plans and performance improvement targets.

10.17 The next table summarises the budget additions as described in paragraph 10.15.

Table 14: Proposed allocation of additional resources

11. Performance management

11.1 As part of the process of linking budgets more closely with performance management, proposals for additional spending should indicate measurable improvements in performance anticipated and any significant savings proposals should include a plan of how the proposal will be implemented.

11.2 This is a key feature of future assessment by the Audit Commission and in updating the Comprehensive Performance Assessment. It is therefore necessary for all Executive Members to review their plans and monitor achievement against them during 2004/05 for all the proposed growth and redeployment proposals set out in Appendix 4.

11.3 This process is extended to the release by the Leader of the contingencies set aside in Table 14 against business plans and targeted improvements in performance.

11.4 This follows the process introduced into the 2003/04 budget for the additional £3.5m sums respectively for domiciliary care of older people, delayed discharges from hospitals and improvements in local roads and footways. The £3.5m extra for domiciliary care has provided for more care as previously reported. The additional £3.5m for delayed discharges from hospitals was initially thought to be required on an one-off basis, but has now been built permanently into the 2004/05 budget to cope with the continued turnover in hospital beds. Delayed discharges due to social care delays have been substantially reduced. The £3.5m added for local roads and footway improvements was added for 2003/04 only subject to review of performance and the budget situation in 2004/05. It is possible for this sum to continue for a further year, subject to a similar review on improved performance and the scope for its continuation into 2005/06 in the light of the budget situation for that year.

12. Risk management

12.1 The greatest risk remains the continued uncertainty around future grant loss. The grant equalisation reserve was created in the 2003/04 budget to mitigate this risk, both in terms of continuing contributions to the reserve and the use of one-off resources accumulated in the reserve. It had been planned to reduce the contribution to the reserve proportionally with the loss of grant in 2004/05 and 2005/06 and in to later years as appropriate. The 2003/04 budget and council tax rise was also set taking a three year view - to take the initial grant loss in 2003/04 and plan for future council tax rises which were more sustainable and at a lower level, using the one-off accumulated balances in the reserve to smooth out fluctuations between the years.

12.2 Although a further £8m of formula grant has indeed been lost in 2004/05, this has been offset by the extra £7.5m provided by the Government to keep council tax rises to low single figures (but with no certainty of its continuation into 2005/06). This merely defers the potential grant loss and puts back the planned withdrawal from the grant equalisation reserve to the three year period 2005/06 - 2007/08.

12.3 The grant loss risk remains alive therefore and without the planned use of the grant equalisation reserve it would be necessary to start planning from 2005/06 reductions of £19m in the Education Budget and £7.5m across all budgets to offset the extra grant received in 2004/05 only.

12.4 The use of the grant reserve and the three year budget plan follow in paragraphs 14 and 16. The consideration of risks, use of reserves and balances and forward financial plans are also critical to the new statement required under Section 25 of the Local Government Act which is dealt with in paragraph 19. That statement covers the other potential areas of risk that need to be taken into account in setting both the 2004/05 budget and looking forward over the next three years.

13. Balances

13.1 The variations in general balances anticipated during 2003/04 and their potential use have been identified in Tables 12 and 13.

13.2 The forecast use of balances by 31 March 2005 is set out below:

Table 15: Forecast use of balances by 31 March 2005

	£m
Balances at 31 March 2003	7.9
Variations during 2003/04 (Table 12)	1.7
	9.6
Less allocation to Schools Budget	-1.0
Estimated balances at 1 April 2004	8.6
Planned use in support of 2004/05 investment	-1.4
Estimated balances at 31 March 2005	7.2

13.3 The minimum prudent level of balances is 0.6% of the budget of £6.3m, which leaves £0.9m of balances available to cover potential overspends in 2003/04, uncertainties or risks in 2004/05, or to carry forward into 2005/06 as indicated in Table 14.

14. Earmarked reserves

14.1 In addition to general balances there are a number of specific reserves earmarked for particular purposes. The protocol for earmarked reserves, setting out the purpose, use, management, control and review of each reserve is detailed in Annex 1 to Appendix 10. This is a key component in the Section 25 statement. The estimated variations in each reserve are summarised in Appendix 10.

14.2 Total earmarked reserves at 1 April 2003 were £62.0m and they were expected to be at similar level of £62.1m at 1 April 2004 in setting the 2003/04 budget. The current estimated balance at 1 April 2004 is lower at £52.8m and this is expected to return to about £56.8m at 31 March 2005.

14.3 The two main earmarked reserves are the schools reserve and the grant equalisation reserve which are estimated as £26.6m and £13.1m respectively at 1 April 2004.

14.4 The schools reserve represents the balances on schools delegated budgets which are ring-fenced and carried forward for use in future years. The total on the reserve was £28.3m at 31 March 2003 but some decline is anticipated in 2003/04. Although the reserve is expected to decline to £23.6m at 31 March 2005, this is primarily because of the use of school reserves to support invest to save schemes in the Education capital programme through the loan scheme. Schools unspent balances of their delegated budgets are forecast at £26.5m. This is still a healthy position (5.2% of schools delegated budgets), and reflects the over-passporting to support the schools budget in 2003/04 and the use of the extra targeted grant in 2004/05 to remove all deficits.

14.5 The total loss of grant is £19m in Education damping and £7.5m in the extra grant to aid council tax payers in 2004/05 only. A potential loss of grant of £26.5m on a continuing basis therefore has to be made good by either cuts in services, higher council tax rises or planned use of the grant equalisation reserve. £13.1m will be available in the reserve for use on a one-off basis at 1 April 2004, and it is planned to continue the budgeted contribution of £7.9m to the reserve for a further year because of the effective deferral in grant loss explained earlier in this report. The planned contribution to reserves just about covers the extra one-off £7.5m grant in 2005/06 and if applied in full that year will save cuts of the same amount or 2% on the council tax before any other increases. Paragraph 16 on the three year budget plan shows how the reserves might be used over that period, depending upon the level of floors and general settlements.

14.6 The reserve for job evaluation transition costs also continues to be built up in anticipation of the extra costs that will inevitably result when the pay and benefits review is implemented. £4m will be available at 1 April 2004 and this will represent 2.2% of the non-teaching staff pay bill at 31 March 2005.

14.7 The capital reserve which was £23.7m at 31 March 2002 has now been utilised as the capital programme has gathered momentum over the last few years and revenue contributions to capital have been used in the year they have been budgeted for to finance capital payments. An extra £1m contribution is proposed in 2004/05 to meet the future unfunded gap in the programme (paragraph 10.4). The reserve is expected to be fully utilised by the end of 2005/06.

14.8 The other main reserve is for insurance and the reserve balance is expected to decline in 2004/05 due to the current level of fire damage commitments. The position will be reviewed on the closure of the 2003/04 accounts.

15. 2004/05 budget

15.1 Taking all these changes into account the final budget proposals for 2004/05 can be summarised. Service budgets have been adjusted for planned carry-forwards, virement from capital to revenue (Environment) and the deletion of the requirement to meet the anticipated £1m overspend in setting the Schools Budget. Additional resources held in contingency will be allocated to services against the required business plans during the year. The resultant cash limits for each service are:

15.2 This clearly shows the effect of the overall 12.1% cash increase on Social Services and the extra 8% commitments on Environment from waste management costs and the £1.8m virement from capital to revenue (but which does not change the overall spending level).

15.3 Other budgets compared with 2003/04 can be summarised as follows:

15.4 The £12.7m contingency for 2004/05 includes the following:

15.5 Bringing all these budgets together, results in an overall budget requirement of £1,052.3m.

15.6 The 2004/05 budget requirement is £58.4m or 5.9% higher than the 2003/04 adjusted budget. The reasons for the increases can be seen in Tables 15 and 16.

15.7 The budget requirement will be met as shown in the next table.

15.8 As previously explained the council tax for the County Council shown on the overall council tax bill will appear to have reduced by 0.5% from £844.56 in 2003/04 to £840.15 in 2004/05. This is because the Fire Authority will set its own precept for the first time from 1 April 2004. The adjusted increase taking account of the change in Fire funding arrangements is from an adjusted 2003/04 council tax of £802.39 to £840.15 - an increase of £37.76 per annum, 73p per week - or 4.7%.

15.9 It is anticipated that the overall council tax bill for 2004/05 will increase by about 6%, as follows:

Table 21: Provisional council tax bill 2004/05
	2003/04 Band D	2003/04 Adjusted Band D	2004/05 Band D	Increase Actual Apparent
	£	£	£	%	%
Hampshire County Council	844.56	802.39	840.15	4.7	-0.5
Hampshire Police Authority	97.29	97.29	106.81	9.8	9.8
Hampshire Fire and Rescue Authority	0	42.17	52.38	24.2	-
Average District (excluding parishes and special expenses)	117.94	117.94	123.61	4.8	4.8
Average Band D in Hampshire	1,059.79	1,059.79	1,122.95	6.0	6.0

15.10 The overall budget can be compared with FSS blocks as set out in Table 22. Comparisons can only be approximate because of the need to apportion central support services and revenue contributions to capital, and contributions to reserves and balances.

15.11 The 2004/05 budget is £44.1m (4.4%) over FSS compared with 3.8% above FSS in 2003/04. The excess is equivalent to 11% on the council tax.

15.12 The overall comparison of FSS, grant budget and council tax increases is as shown in Table 1.

15.13 The trends in FSS, budgets and council tax are as follows:

Table 23: Percentage increases in council tax compared with FSS, grant and budget
	Government		County Council
	FSS	Grant	Budget	Council tax
	%	%	%	%
1998/99	2.7	-0.1	3.9	10.0
1999/00	3.9	2.8	5.2	9.4
2000/01	5.2	4.7	5.3	5.8
2001/02	5.8	5.6	5.9	5.5
2002/03	5.4	5.1	6.9	7.9
2003/04	5.7	3.8	8.2	15.0
2004/05	5.3	6.0	5.9	4.7

15.14 2004/05 is the first year that the Government grant increase has been more than the FSS increase or even the Council's budget increase. As a result the 2004/05 council tax rise is the lowest since it was introduced and the lowest tax rise for 20 years (since domestic rates increased by 3.5% in 1984/85).

15.15 The reason for the increase is the council tax rise are set out below:

Table 24 : Explanation of council tax increase

15.16 Provisional comparisons with other county councils suggests that:

· Hampshire has the fifth lowest grant increase

· despite that the budget rise is likely to be in the lower quartile and the council tax rise at or close to the lower quartile

· the actual council tax will remain within (or close to) the lower quartile as targeted in the Corporate Strategy, despite grant losses in recent years.

15.17 Comparisons of overall council taxes now have to be distinguished between those county councils still responsible for fire services and those where there are combined fire authorities.

16. Three year budget plan

16.1 Appendix 9 assesses the likely budget and council tax rises for 2005/06 and 2006/07 to complete the three year budget plan. The Appendix explains the assumptions behind the figures for future years.

16.2 2005/06 will be the third year of the existing Spending Review and overall figures are expected to remain the same as originally announced in 2002. But the level of floors and ceilings for 2005/06 are not known and the key issue will be the degree of continued damping provided in Government grant for the Schools Budget. 2006/07 will begin the revised figures from Spending Review 2004. Figures for this should be available in late summer when the forecasts will need to be reviewed. However current predictions are that SR2004 will have much lower increases than those from SR2002 and the overall FSS increase is likely to reduce to just under 3%.

16.3 The figures for 2005/06 and 2006/07 can only be indicative at this stage. As the Appendix 9 shows much depends on the grant settlement and budget increases in 2006/07 and two possible ranges for 2006/07 are summarised below:

Table 25: Forward budget plan
	2004/05	2005/06	2006/07	2006/07
			(as FSS increase)	(assuming 5% cash increase for schools and Social Services)
	%	%	%	%
FSS	5.3	4.5	2.9	2.9
Budget	5.9	4.9	3.2	4.6
Grant	6.0	3.4	2.5	2.5
Council tax	4.7	7.2	3.8	7.3

16.4 Basically this suggests lower grant increases as the floor unwinds and historically very low budget increases which may well be unachievable to keep council tax rises down to less than 5%. Tax rises of 7% to 8% therefore look likely in 2005/06 and 2006/07 before the use of the grant equalisation reserve. This is not unexpected given that the remaining grant loss of £26.5m has simply been deferred.

16.5 The budgeted contribution to the grant equalisation reserve is sufficient to reduce this projected tax rise by a cumulative total of 2%. To reduce the tax rise to 5% in each of 2005/06 and 2006/07 it will be necessary to use £13.0m from the reserve (£1.1m in 2005/06 and £11.9m in 2006/07). This shows the necessity of retaining the reserve contribution (£7.9m per annum) and the one-off amount already accumulated in the reserve (£13.1m at 1 April 2004).

Financial planning framework

16.6 The Annex to Appendix 9 contains the County Council's current financial management policies which are presented in the form of a medium-term financial planning strategy and form the framework for the indicative budgets for 2005/06 and 2006/07.

16.7 The Audit Commission's 2003 audit and inspection letter said that "The Council's financial planning framework remains effective and continues to identify and address budgetary and financial pressures. The corporate governance framework continues to develop and will be further improved if your financial management policy is integrated within it. Actions have been agreed to ensure closer links between financial and strategic planning in future budget processes".

16.8 The Audit Commission suggested this might include within medium-term financial planning:

· an explicit assessment of the resources required to achieve key corporate outcomes and targets

· how existing resources are being reallocated to priority areas

· proposals for meeting any remaining resource gaps, especially the balance between internal and external funding

· risk assessment of the sustainability of resourcing proposals (including consideration of the level of council tax which is supportable).

16.9 The Auditor acknowledges that the initial steps needed to respond to this were considered by Cabinet in September 2004. The Audit Commission suggest that the key challenge is to ensure, and demonstrate how, the resource framework is used to build and/or shift capacity to deliver the Council's priorities.

16.10 These issues have been dealt with in the preceding paragraphs in this budget report, and the projected use of the grant equalisation reserve will allow for a sustainable three-year plan.

16.11 Additional resources have been targeted within the "low single figures" council tax rise to the short-term Cabinet priorities within the Corporate Strategy. The resource gaps in the three-year plan and the capital programme can be met as set out in this report.

Budget consultation

16.12 The Cabinet decided not to carry out a further budget consultation following the extra Government grant announced in December as the public consultation had previously supported a council tax rise of just under 7% to maintain existing services. This was equivalent to the council tax rise of just under 5% now possible with the increased level of grant.

16.13 Further consultation on the forward plan would be welcomed by the previous groups consulted with, as well as remaining necessary to demonstrate good practice to secure support for future council tax rises. This would be best done when final figures are available from SR2004, before the development of the detailed budget strategy for 2005/06.

Past trends

16.14 As well as looking forward, it is possible to update the past trends in FSS, grant, budget and council tax and these are set out in Appendix 11.

17. Treasury Management

17.1 The County Council is required to adopt a treasury management strategy for 2004/05 and this is set out in Appendix 12 for approval. The Appendix

· outlines a proposed strategy for the management of the Council's long-term debt portfolio in the light of forecast trends in long and short-term interest rates over the next year and beyond

· summarises the arrangements for the investment of the Council's surplus funds

· sets out a revised treasury policy statement for submission to the County Council for approval, to reflect the repeal of Section 45 of the Local Government and Housing Act 1989 and the introduction of the new prudential code for capital finance.

18. Prudential indicators

18.1 The Cabinet in November noted the new prudential system for capital finance from 1 April 2004 and agreed a policy on the use of unsupported borrowing. The prudential code provides a framework for local authority capital finance to ensure that:

· capital programmes are affordable

· external borrowing and other long-term liabilities are within prudent and sustainable levels

· treasury management decisions are taken in line with professional good practice.

18.2 Appendix 13 contains the prudential indicators required by the code for the County Council. The summary of prudential indicators in the Annex to Appendix 13 will be submitted for approval by the full Council in setting the budget.

19. Section 25 report, Local Government Act 2003

19.1 The Act comprises a series of duties and powers that give statutory support to important aspects of good financial practice.

19.2 Section 25 of the Act requires the Chief Financial Officer (the County Treasurer) to report to the County Council when setting its council tax on:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget

19.3 The County Council is required to have regard to this report in approving the budget and council tax. It is appropriate for this report to go first to Cabinet and then made available to the County Council in making its final decision.

19.4 The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. This puts emphasis on the medium-term budget strategy. This is set out in Appendix 9 where the forward budget plan is put in the context of the financial management policy agreed by the County Council. A three year view has been taken in setting each year's budget especially following the grant loss from 2003/04 onwards.

19.5 Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 10. The most important reserve in terms of the three year view is the grant equalisation reserve and this has been discussed in paragraph 14 relating to reserves and paragraph 16 with reference to the three year budget plan.

19.6 Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. This budget report is the conclusion of a detailed process of prior consultation and consideration throughout the current year with reports to Cabinet in:

· April 2003

- draft strategy and consultation process

· May 2003

- budget planning 2004/05 and 2005/06

· June 2003

- agreement of 2004/05 budget strategy and budget consultation process, including a community workshop and options based on 5%, 7% or 9% council tax rise

· July 2003

- community workshop

· Sept 2003

- findings from workshop, update on budget issues

- other budget consultation meetings with business, voluntary sector, local strategic partnerships, Schools Forum (and residents/council taxpayers associations later in the year)

· Oct/Nov 2003

- meetings between Leader and Executive Members to review budget pressures, scope for savings, and priorities related to the three year planning cycle, corporate strategy and short-term Cabinet priorities.

· Nov 2003

- Education funding changes

- provisional local government finance settlement

· Dec 2003

- revised settlement (extra grant) and budget guidelines

· Jan 2004

- consideration by Policy Review Committees and Executive Members decisions based on budget guidelines

· Feb 2004

- recommendations from the Leader and Cabinet to the full Council to take the final decisions

19.7 The County Council's main earmarked reserves are:

· Schools - which cannot be accessed for purposes outside the individual schools budget (though the newly introduced loan scheme for Education capital projects makes temporary use of up to 25% of school reserves)

· Grant equalisation reserve - required against anticipated grant loss of £26.5m over the next two to three year period and possibly beyond, depending upon the continuing level of Education damping grant and the floor grant increase for the County Council for 2005/06 onwards.

19.8 The County Council's policy on balances is to hold a minimum prudent level equivalent to 0.6% of the budget. This is relatively low but is sustainable given past experience provided that other elements of the financial management policy are maintained, particularly sound budget monitoring and budgetary control, and no supplementary estimates, so that spending variations are contained as far as possible within the year.

19.9 The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the risk management, balances and reserves paragraphs in this report.

19.10 Because of the changes in Government funding and policy during the year, and the need to secure public support after the 15% council tax rise in 2003/04, this has been a very comprehensive process. The uncertainties have been reduced over this period of consultation and review and the County Treasurer has ensured that appropriate information and advice has been given at all stages so that a positive opinion on the robustness of the estimates and reserves can now be given under Section 25, based on the recommendations in this report.

19.11 In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework which covers these issues. The forward budget plan and reserves take account of the main risks and uncertainties, around forward projections and Government funding. Other uncertainties and risks include:

· Inflation

- the main teachers pay award of 2.5% is known, cash limits have been set assuming other pay awards of 2.5% with a contingency for a further increase of 1% on non-teaching staff. This should be adequate and if not required in full will provide to a small extent some extra resource for the pay and benefits review

- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (eg in Social Services purchase of care, and in repairs and maintenance retrospectively) where higher prices are likely or have been experienced in 2003/04

- interest rates are more likely to rise than fall and provision has been made from the current cost of borrowing of around 4.8% long-term to 5% in base rates by the end of March 2005

· Pay drift

- increments are not budgeted for and services will need to secure efficiency savings of £3.7m to offset these. Past trends suggest that this will be managed.

- there is a substantial potential liability from the implementation of the pay and benefits review. This consists of transitional protection costs arising from job evaluation, possible increased pay for some categories of employee from the process and the need to move closer to the Hay median of pay. A reserve has been created towards transitional costs. One-off investment has been provided to meet the costs of progressing the review. Further resource may be required over the next two budgets to implement fully the outcomes of the review.

· Pensions

- expected increases in employers' contributions following the next actuarial valuation at 31 March 2004 have been built into the forward plan for 2005/06 and 2006/07

· Additional spending, savings and redeployments built in to the budget

- these are subject to planned review by Executive Members, and additional amounts currently held in contingencies will only be released by the Leader against business plans and targeted performance improvement measures

· Efficiency savings

- there is a good track record covering the process of setting and achieving these savings

· Income

- there is an annual review to maximise income and increase income at least in line with non-pay inflation

· Achievement of budget plan

- well established and sound history of very close achievement of outturn to budgets

· Strength of financial information and reporting arrangements

- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year

- the Audit Commission has drawn the Council's attention to consider more regular capital programme monitoring reports and the reporting of final costs on capital schemes

· Capital programme

- capital strategy, asset management plans and the local transport plan have all been accredited with the highest scores in the comprehensive performance assessment

- the capital programme is now practically fully resourced and will be subject to full review by the Leader in May/June 2004

· Level of borrowing and outstanding debt

- fully covered in treasury management strategy and prudential indicators

- the policy on unsupported borrowing aims to contain the financing costs within the forward budget plan cash limits without an additional impact on the council tax payer

· Contingent liabilities

- the County Council self-insures, so it handles all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims, assessed at £10m at 31 March 2003

· Statement on the system of internal financial control

- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned

- the review of the effectiveness of the system of work internal financial control is informed by the managers within the County Council, by internal audit and the Audit Commission in its annual management letter and other reports

· Audit Commission

- gave an unqualified opinion on the 2002/03 accounts

· Other risks

- there are potential legal claims outstanding and other possible risks which past trends suggest can be met from balances if required. There is no known risk or liability which requires a contingency or reserve not already provided for in the budget report

- changes in function. These vary from year to year and are evident in the adjustments that have had to be made to 2003/04 budgets for comparison purposes. The main change which will affect future budgets is the Green Paper `Every Child Matters'. Some contingency provision has been made for initial start-up costs

- the Balance of Funding Review is unlikely to affect the 2005/06 budget, but changes from this and further grant formula changes could be made in 2006/07 with the start of the new SR2004 period. Reserves need to be adequate to protect against potential volatility in that year.

19.12 Provided that the County Council considers the above factors and accepts the budget recommendations, including the level of earmarked reserves, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.

20. Recommendations

20.1 The recommendations are set out in the decision sheet summary which precedes this main report.

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.

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