Contact: Jon Pittam, ext 7400

(With the concurrence of the Chairman under Section 100 (B) (4) (b) of the Local Government Act 1972, this matter was included on the agenda to ensure that initial parameters can be set for the Autumn round of budget discussions).

1 Introduction

1.1 Cabinet on 26 July 2004 requested a further report in September on the implications for the County Council's three year budget forecasts and the future budget strategy in the light of various Government announcements on Spending Review 2004 (SR2004), schools funding and other issues. The provisional local government finance settlement for 2005/06 will confirm the County Council's formula spending share (FSS) totals and its revenue support grant (RSG) which will provide more certainty than the national totals derived from SR2004 used in this report.

1.2 This report:

· updates the three year budget forecasts as requested

· sets some initial parameters for discussion in the Autumn between the Leader and Executive Members on the base budget, pressures and efficiency savings, before budget guidelines for 2005/06 are set in December 2004.

· provides a possible approach to budget consultation for 2005/06.

1 SR2004

1.1 The national percentage FSS increases in cash terms are summarised below:

Table 1 FSS cash increases

1.2 Total FSS increases average 5.5% over the three years focused on Education, children's services and older people and other adults.

1.3 However the County Council's Education FSS will be lower than average because of the loss of Government grant flowing through from the 2003/04 formula changes. The average increase in schools FSS (SFSS) will be around 7% per pupil but the County Council as a floor authority will receive the minimum funding guarantee increase set at 5.5% per pupil. This is intended to cover the cost increases between years and some headroom to allow the local funding formula to operate, or to direct additional resources where they are most needed. The Government expects "each authority to passport in full its SFSS increase into a matching increase in its schools budget, unless there are wholly exceptional circumstances". As a floor authority, there are no such circumstances and the County Council is required to passport.

1.4 Children's services is now a separate FSS block, with large national cash increases in the first two years - the third year being much lower. Older people and other adults shows a very high 9.9% cash increase for 2005/06. However this is overstated, and after allowing for the assimilation of preserved rights specific grant into FSS, results in a national cash increase of 6.5% in 2005/06, falling to lower amounts still in the following years. Even this may be overstated if these cash increases are further top-sliced for national projects (20 joint projects between local authorities and the National Health Service to provide seamless integrated care for older people and to provide alert alarms for older people in their own homes).

1.5 Less is set aside for other services. Highway maintenance increases by just 0.8% pa in cash terms over the three year period (including cash freezes in 2006/07 and 2007/08). This implies that real terms cuts are intended, unless offset by equivalent procurement savings. By contrast the County Council has increased its own spending on local roads and pavements by £3.5m over its base budget to reflect concerns in the MORI public surveys. Environmental, protective and cultural services (everything else) increases by an average 2.6% pa, over the three year period, below the latest retail price index increase of 3.2% and even more below the local authority cost and volume increases, especially on waste management. Because the County Council currently spends 44% above EPCS FSS, an average increase of 2.6% in FSS represents and increase of just 1.8% on current budget.

1.6 Government grant increases will not keep pace with FSS increases, resulting in a 6.7% projected national council tax rise for spending at FSS in 2005/06.

1.7 This will not result in "low single figure council tax rises". The one-off additional grant of £340m nationally to enable this to happen in 2004/05 has not been rolled forward into 2005/06. The County Council therefore loses £7.5m in its share of that grant which has to be made good in 2005/06 - one of the reasons for the grant equalisation reserve. It is anticipated that about another £6m of grant has been lost because of the changes in schools formula funding, despite the floor mechanism restricting the total loss anticipated over the next few years.

1.8 A budget strategy could be set for each service based on these national cash increases but is not recommended because the actual figures for the County Council will not be known until late November 2004, and they do not reflect local spending pressures and priorities.

1.9 SR2004 also contained some initial information on efficiency savings, but not sufficient to target precisely at local level at this stage. Further `guidance' is expected from the Office of the Deputy Prime Minister (ODPM) over the next month or so. Efficiency savings do not affect these SR2004 cash increases but they do provide the capacity either:

· to reduce the projected council tax rise

· or to be used to meet other pressures not matched by Government grant (for example short fall in funding for highway maintenance and waste management)

· or a combination of both.

1.10 Efficiency gains expected from local government are 2.5% pa from 2005/06. At least 50% is expected to be cashable "releasing resources for the
front-line". SR2004 states that:

· 40% to be delivered through schools

· 10% through policing

· 35% through procurement in other services (for example adult social care, children's services, housing, highways maintenance and waste management)

· 15% from back-office functions and improved productivity of all staff and processes (for example sharing of local authority back office functions, including council tax and business rate collection).

1.11 Not all these are targeted at County Council services, nor is it possible to achieve cash savings from schools budgets because of the operation of local management of schools and the passporting requirements for the minimum funding guarantee increase.

2 Three year budget forecasts

2.1 The indicative budget plans for 2005/06 and 2006/07 approved by the Cabinet in February 2004 have been updated, and a new forecast added for 2007/08.

2.2 The Government announcements in the Summer:

· provided spending plans for 2006/07 and 2007/08 (plans for 2005/06 remain largely unchanged)

· introduced a new FSS block for children's services, separate from the remainder of Social Services

· confirmed the minimum funding guarantee for schools and the damping (floor) arrangements for SFSS in 2005/06

· proposed the new dedicated schools budget for 2006/07, imposed nationally and met by specific grant.

2.3 Forecasts have been adjusted for the effect of these changes on the best information available. However the forecasts are based on a number of uncertain assumptions:

· the effect of data and methodology changes on the distribution of FSS control totals are ignored. This is perhaps not a significant issue in 2005/06 due to the methodology freeze and the Government's announcement that 2001 census data will continue to be excluded. It could be more significant in 2006/07 and 2007/08

· no account has been taken of any possible rebalancing of Government grant in 2006/07 arising from the introduction of schools specific grant, which would be necessary if the impact on the balance of funding was to be spread across all local authorities, not just Education authorities

· similarly no account has been taken of possible outcomes from the Lyons (continued balance of funding) review or from the revaluation of properties for council tax purposes, due to take effect from 2007/08

· there are uncertainties about the split of the EPCS FSS between tiers and about the extent to which the increases in capital financing FSS will be diverted into additional PFI grant

· also unclear how general floor and ceiling assumptions might operate once schools funding has been removed from FSS. It is assumed that Education damping will continue to unwind gradually but that no general floor grant will be received after 2005/06.

2.4 Spending assumptions are largely unchanged from those in February. They are:

· pay increases at 2.95% in each of the next three years - this reflects the agreed teachers' pay increase in 2005/06 and local government increases (more certainty and earlier than previous years)

· price increases at 2.5%

· increased local government pension scheme (LGPS) costs equivalent to 1.5% of payroll in each of the next three years taking the employers' contribution to 300% of the employees' by 2007/08

· increased capital financing charges in line with forecast Government supported borrowing increases in the capital programme

· anticipated increases in costs payable under the waste management contract

· other minor base budget changes - but these largely ignore Social Services where no satisfactory independent cost drivers relating to service demand have been identified

· forecasts are based on a continuation of the requirement to passport schools increases.

2.5 The indicative budget plans for 2005/06 and 2006/07 took no account of the use of the grant equalisation reserve. Forecasts for the next three years have been prepared on the assumption that:

· £20.9m will have been accrued in the reserve by 31 May 2005 and it is assumed that this will be applied pro rata to `grant loss'

· the total grant loss remaining from 2004/05 is £26.4m (£18.9m on schools and £7.5m generally)

· it is also assumed that the effect of `grant loss' in a particular year will be supported from the reserve on a tapering basis over 3 years and that as the prime responsibility for schools funding will pass to Government in 2006/07, that most of the loss of grant occurs in 2005/06

· the impact of replacing £7.5m in 2005/06 as a result of the additional increase in 2004/05 being `one off' also has to be absorbed as well as the continuing effects of formula changes on schools begun in 2003/04.

2.6 The new approach to children's services in the Children's Bill suggests a need to separate children's from adult Social Services for budget planning purposes. Comparisons between spending on Social Services and FSS both at the overall level and for client group components is heavily influenced by the resource equalisation `uplift' in the 2003/04 grant settlement. This not only added £1.1bn to the control total to reflect local authority spending levels but involved larger increases in the children's and other adult sub blocks partly funded by a reduction in the older people sub block. Overall the effect was to bring FSS into line with the collective pattern of local authority budgets. In very rough terms the comparisons are:

Table 2 Social Services budget comparison with FSS

2.7 These assumptions do not at this stage take account of the costs of the pay and benefits review which could be substantial. This is to some extent counter-balanced by retaining current budgeted contributions to reserves and around £4.5m available in balances above the targeted level. Balances provide some flexibility for final budget decisions, worth about 0.5% on council tax if used over two years.

2.8 Also at this stage no attempt has been made to identify additional spending pressures or new growth proposals. For council tax in low single figures it will be necessary to offset additional pressures by redeployment of resources or from cashable efficiency savings, with new growth minimised or similarly offset by cashable efficiency savings.

2.9 The February budget forecasts predicted a budget increase of 4.9% with a resulting council tax rise of 7.2 % for 2005/06. In July the council tax rise was estimated at 6.8%, compared with the national 6.7% rise of spending at FSS. This was after the one-off grant loss, but takes no account of additional spending pressures. The County Councils Network are estimating that a 9% council tax rise is required to cover shortfalls in Government funding, but most of the committed increases (pensions, waste management costs) are already built into the County Council's forecasts. The current estimate is now 7.3% taking account of the further exemplification of changes in SR2004 and the effect of the elimination of funding contributions towards Magistrates' Courts from 1 April 2005.

2.10 If the phased use of the grant equalisation reserve is taken into account it would be possible to reduce the council tax rise in 2005/06 from over 7% to just over 5%.

2.11 The three year forecast on the basis of these assumptions and caveats can be summarised as follows:

Table 3 Revised three year budget forecasts

2.12 However this level of forecasts is derived from a relatively low budget increase compared with previous years as illustrated below.

Table 4 Trends in grant, budget and council tax rises

2.13 If the County Council wishes to spend more in line with increases in previous years and fund extra spending pressures on services, especially children's services, then the council tax rises will be proportionally higher. The position is complicated from 2006/07 onwards because of the new schools specific grant and the impact that may have on remaining grants.

2.14 It is also worth noting that although the `balance of funding' is improved by the introduction of the specific grant, the council tax rise remains the same in spending terms on the lower budget base after the deduction of the new specific grant as illustrated next:

Table 5 1% variation in spending and council tax

2.15 These figures assume the current budget strategy of passporting the cash increases in FSS through to Social Services. As there is no requirement to do so, with the separation of the children's services block to set along side the LEA block (which is not passported) it is proposed not to passport the cash increase for children or older people and other adults in 2005/06.

2.16 This would put all services, other than the mandatory requirement for schools, on the same basis as a starting point, that is base budget increase to provide the same level of service in 2005/06 as in 2004/05. Within a passported cash increase Social Services would have the capacity for growth above its base budget to absorb new or additional pressures. For Social Services and also other services it does not necessarily mean that additional pressures can all be met by redeployment or efficiency savings, but final decisions could be made in setting budget guidelines after the Autumn reviews and possible consultation processes.

2.17 A base budget only starting point has the potential to reduce the council tax to nearer 3% for 2005/06 as shown in the next table; but that represents something the County Council has not achieved because of additional demands, pressures and political priorities for many years. So the forecast on that basis must be regarded as illustrative, rather than certain. Constraining increases at this level over the three year period is very unlikely, unless equivalent cashable efficiency savings are generated to offset the additional pressures and priorities.

Table 6 Forecasts restricting Social Services to base budget growth

2.18 These projections suggest a potential range of budget and council tax rises, depending upon the starting point and the use of reserves as shown below:

· Budget rises 3.5 to 5.0%

· Council tax rises 3.2 to 7.3%

2.19 Coincidentally a council tax rise of 3.2% would match the current retail price index rise and would be in line with projected pension increases for September. That perhaps forms the minimum benchmark against which Cabinet could then balance spending pressures and priorities with the resulting council tax rises or efficiency savings targets.

2.20 The starting point, based on the 2004/05 budget strategy to passport cash increases to Social Services as well as schools, with base budget increases for all other services, but still using the grant equalisation reserve, would be higher than restricting Social Services to the base budget increases:

· budget increase 4.2%

· council tax rise 5.2%

2.21 This is probably the central point for budget discussions and consultation before guidelines are set at the December Cabinet meeting as experience suggests that the budget increase is more in line with past budgets.

3 Efficiency gains

3.1 The definition of, and methodology for, achieving value for money and efficiency gains was set out in the separate report (item 8). The very broad guidance in SR2004 was set out in paragraphs 2.9 and 2.10 of this report, but is insufficiently focused to prepare clear targets at this stage. The emphasis in SR2004 is to use efficiency savings for the `front line' rather than reduce council tax. This is necessary in Government terms because of the inadequate FSS cash increases and resultant grant towards highway maintenance, waste management and also the other environmental, protective and cultural services.

3.2 The budget forecasts presented in paragraph 3 have therefore assumed that initial budget discussions will be on a tight budget starting point, with cash efficiency savings used to meet additional pressures and political priorities. Depending upon the balance between the two there may be additional scope to reduce the council tax but that will also require firm decisions not to enter in to new commitments and to stop doing other things.

3.3 Budget proposals over the base budget starting point will therefore need to demonstrate:

· a business case

· how performance will be improved

· value for money and why extra resources rather than redeployment of existing resources are required

· that any cash efficiency targets set are achieved based on SR2004/Gershon principles

· non cashable efficiency gains, are also achieved to absorb new pressures.

3.4 The County Council has always targeted efficiency gains in its budget strategy over many years. The level of efficiency gains identified in the 2004/05 budget was:

Table 7 2004/05 efficiency gains

3.5 This is equivalent to 1.35% on the council tax in 2004/05. The main savings were the absorption of salary increments (£3.7m) and the first phase of the SAP (Enterprise project) benefit realisation savings (£0.8m).

3.6 A similar level of efficiency gains from absorbing pay increments and salary drift (regradings etc) is expected within the existing budget strategy for 2005/06.

3.7 The second phase of SAP benefit realisation will come on stream, adding a further £0.7m cash saving, with a total contribution from back office systems savings of £1.5m in 2005/06. Although these cash savings are currently being ploughed back in to the capital programme, they will now be diverted to revenue cash savings by some planned slippage over a longer period of locally financed capital programme schemes.

3.8 The budget strategy also predicates an annual review of all income charges and the maximisation of income. Budget discussions in the Autumn could also explore opportunities to introduce new discretionary charges - the scope here being mainly in Recreation and Heritage and Social Services. New powers enable the introduction of road pricing and congestion charging although it is anticipated that the Cabinet will not wish to pursue this in isolation from the local authorities and the Highways Agency or without equivalent Government support for new public transport infrastructure, such as South Hampshire Rapid Transit.

3.9 There are also new trading powers for local authorities to trade with anyone in their core or statutory functions. Examples cited by Government include contract catering and cleaning, refuse disposal and IT Services. To a certain extent the County Council is already trading with other authorities in some of its businesses but the scope to do more and create additional business surpluses or reduce the cash incurred by the County Council by achieving economies of scale over the latter part of the three year period could be explored.

3.10 The main area identified in SR2004 to achieve cashable efficiency savings was around procurement, some 35% of the targeted efficiency gain for local government. The County Council as explained in items 8 and 9 has a good track record and is at the forefront of procurement innovation. SAP has provided an opportunity for enhanced electronic procurement and aggregation of services provided that all services use the corporate buying power generated rather than `doing their own thing'. However it is not possible, directly to achieve cash savings in procurement from schools, although clearly schools benefit substantially from lower prices through the central buying arrangements. Schools generally are expected to find 40% of the SR2004 efficiency gains but that will not produce cash savings for the County Council for reasons explained earlier.

3.11 SR2004 assumes 2.5% efficiency gains, of which 50% should be in cash terms. It would therefore be appropriate to explore 1.25% cash efficiency savings on procurement spend throughout the Council's activities (excluding schools) as follows:

Table 8 Procurement cash savings targets

3.12 None of those savings are as yet certain or specific, but could be set as targets before the Autumn round of discussions. As indicated in the report on value for money (item 8) the County Treasurer and Director of Property and Regulatory Services will work with colleagues across the Council to achieve any procurement targets set over the three year budget plan.

3.13 It is also suggested that initial budget discussion should consider the scope for 1.25% cash savings target on all staffing budgets (again excluding schools). This would be achieved by improving levels of absence management (where overtime and agency staff costs are currently incurred to cover absence), reviewing and reducing levels of management overheads, increasing staff productive time and rationalising service provision through the use of contact and service centres. This would produce a cash saving of £2.9m if it could be achieved without a material impact upon service provision.

3.14 The three specific efficiency savings targets that could initially be considered are therefore:

Table 9 Cash efficiency savings targets

3.15 The procurement and staffing savings figures are based on gross expenditure. When specific grants and income from fees and charges are taken into account the net expenditure saving is a much lower £5.7m cash effect in council tax terms.

3.16 On top of this a further £3.7m (including £2.2m for schools) would be absorbed by non-cashable efficiency savings in not budgeting for pay increments but expecting these costs to be managed within the total pay budget.

3.17 These may or may not be wholly achievable. Some may take more time to come on stream and may not deliver a full year effect in 2005/06. If achieved it would provide scope to absorb additional pressures or new priorities, or to limit the council tax rise further, or a combination of both.

3.18 Other savings may be possible by altering priorities, stopping doing things or through extra or new income. These can also be explored during the Autumn round of discussions. Final decisions can be made on the level of achievable efficiency and other savings for 2005/06 to 2007/08 when setting budget guidelines in December 2004. There will need to be a firm budget plan for each efficiency saving demonstrating clearly how and when each saving is to be achieved so that performance can be monitored. Staff savings targets will need to be incorporated into the workforce plans which will be integrated more closely with the budget cycle this year.

4 Budget strategy

4.1 The suggested budget strategy for 2005/06 to 2007/08 is therefore:

· base budget roll forward for all services excluding schools, based on assumptions set out in paragraph 3.4

· SFSS increase passported to schools, but no additional top up for deprivation, special needs or excluded pupils (if required such growth to be met by cash savings on procurement and energy savings within the schools budget rather than by a council tax top-up to the minimum funding guarantee)

· all other pressures and additional priorities absorbed by efficiency savings, including the review of the potential scope for savings set out in Table 9.

4.2 The suggested budget strategy will form the basis of the Autumn round of budget discussions between the Leader and Executive Members and is for provisional planning purposes only. Budget guidelines for 2005/06 to 2007/08 will be set in December 2004 taking account of:

· the provisional local government finance settlement

· base budgets

· identified pressures and priorities

· as offset by identified and achievable cash efficiency savings.

4.3 Final discussions on the level of the children's services budgets, and indeed for all other services, can be made in the light of the balance the Leader and Cabinet wish to make between:

· budget increases

· efficiency savings

· and resulting council tax rises

5 Supporting People

5.1 The Government at the end of August announced a three-year funding package for Supporting People said to demonstrate "the Government's continuing commitment to improving the quality of life for those at risk, by promoting independent living".

5.2 Individual allocations to authorities will be announced in the Autumn. "These will take account of work we are doing on identifying a fairer distribution of funds between authorities and the evidence we have on opportunities for authorities to make efficiency savings". The existing budget of £34.4m will need to be constrained by whatever efficiency savings target is set over the three-year period. No authority will be required "to find more than 7.5% efficiency savings but.... the average will be well under this figure".

5.3 The aim is to use a service review process to protect the most vulnerable clients. The letter from the Office of the Deputy Prime Minister concluded that "I am also pleased to be able to tell you that you will be able to roll forward into 2005/06 any underspend acquired as a result of your work to identify efficiencies and plan for future provision. I am sure that this will help you to manage your budgets effectively and secure value for money savings". This implies ring-fencing and carry forward of planned savings.

5.4 It is also imperative that these separate efficiency savings targets, when notified, are reported, planned and achieved, in addition to those set elsewhere within Social Services. It is also important that other parts of Social Services do not cross-subsidise Supporting People or pick up the cost implications of these Government set efficiency targets after transferring the service into the County Council. £0.5m of the current pressures in 2004/05 on adult services appear to be created largely by reductions in Supporting People, and the Cabinet may wish to ensure that such budget pressures are reduced or eliminated without requiring additional corporate or council tax support.

6 Budget consultation

6.1 The Cabinet widened the scope of budget consultation for 2004/05 to match Government guidance and best practice. This included for the first time a MORI community workshop.

6.2 Consultative groups have requested earlier meetings to have more impact on longer-term financial planning and Cabinet thinking prior to final discussions being taken.

6.3 The Leader (and/or) Cabinet may therefore wish to meet with previous representative groups in October or November, including:

· Hampshire Strategic Partnership

· business representatives

· Schools Forum

· voluntary sector

· workforce

· residents/council tax payers associations

· Hampshire MPs

6.4 The annual meetings with the Schools Forum and Hampshire MPs have been arranged and the other meetings will be set when Cabinet agree. It is understood that the Leader is also keen for the County Council to engage with the Is It Fair Campaign as part of the general consultation round.

6.5 The key issue is the scope and timing of, another community workshop. There is likely to be nothing new gained from another workshop before there is more clarity about the impact of funding options. It may be better to consult with a workshop in January 2005 on more specific proposals - including growth and savings options - after budget guidelines are set.

6.6 There is also an opportunity for the inclusion of some limited budget and council tax questions in a face to face residents' survey planned for December 2004 and January 2005.

6.7 Another option would be to commission a telephone and website surveys in January based again on the budget guidelines, which would provide an opportunity to quantify the workshop outcomes.

6.8 If the Cabinet wishes to consult the representative groups in the Autumn on a possible range of council tax rises in low single figures, then the range would be between 3% and 5% as shown in the next table:

Table 10 Possible tax options

6.9 These would be broad brush options and illustrative only. The final guidelines are likely to be more precise and driven by actual budget and efficiency savings discussions rather than starting from an arbitrary council tax rise.

Recommendations

The recommendations are contained in the summary decision sheet.

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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