Hampshire Fire and Rescue Authority
	9 February 2005	Item 10
	Budget 2005/06
	Report of the Treasurer and Chief Officer

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

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

1. Introduction

1.1 The following steps have occurred so far in the process for setting the Authority budget for 2005/06:

· the Authority, at its meeting on 8 December 2004 approved the base budget totalling £59.0m

· the statutory consultation took place with the trade unions and business and council tax payer groups on 14 January. All groups felt the proposals to be good (see summary of comments attached as appendix 8). The trade union representatives did however express concern about the perceived deterioration in the condition of older retained fire stations

· the Finance and General Purposes Committee met on 19 January and made recommendations to the Authority, the details of which are set out in paragraph 2.2.

1.2 Since then, further details of the final settlement have emerged, as set out in paragraph 2.4.

2. Finance and General Purposes Committee

2.1 The Committee considered the draft budget report (attached as Appendix 4 but with the appendices removed as they have been updated and attached as separate Appendices in order to reflect the Committee's recommendations).

2.2 At the meeting the Committee resolved:

· That the draft budget of £60.095m presented, representing an approximate 1.5% council tax increase be approved, plus £100,000 for the repair and maintenance of buildings as highlighted at the budget consultation meeting.

· That the Capital Programme and associated Prudential Indicators (Appendices 3 and 5) be approved.

· That the Treasury Management Strategy (Appendix 6) be approved.

· That the Finance and General Purposes Committee be given delegated authority to decide at its meeting on 26 April 2005 whether to proceed with Phase II (the workshops building) element of the headquarters project.

· That a Capital Programme be approved incorporating expenditure on professional fees associated with Phase II up to a maximum of £100,000 to enable detailed specifications to be prepared and allow tender prices to be obtained for both phases.

2.3 The calculation of the base budget is set out as Appendix 1, the proposed revenue budget Appendix 2, the proposed capital programme Appendix 3, the Finance and General Purposes Committee report Appendix 4, Prudential Indicators Appendix 5, Treasury Management Strategy Appendix 6, the calculation of reserves for 2005/06 Appendix 7 and notes from the consultation meetings Appendix 8.

2.4 The following finalisations have occurred since the Finance and General Purposes Committee meeting:

· Final figures have now been received for Revenue Support Grant (RSG) and National Non-Domestic Rate (NNDR). Overall they are slightly higher than assumed.

· The tax base and surplus on billing authorities' collection funds have been finalised. Overall they are slightly higher than assumed

· The income from council tax on second homes has been assessed. This results in an additional £2,000 and this has been added to the expenditure on partnership working initiatives.

· £100,000 has been added to the draft capital programme for repairs to retained stations for 2005/06 only at this stage.

In total the result is to increase income by £170,000. It is proposed to add this to the revenue contributions proposed for acquisition of vehicles, in line with members' stated policy preference. This use of the extra £170,000 would be kept under review during 2005/06, ie should other pressures arise then additional loans could be taken out to substitute for some of the revenue funding of vehicles.

2.5 In summary, taking the recommendations from the Finance and General Purposes Committee and the additional £170,000 now available, the following budget is now proposed:

	£000
Base budget	58,965
Regionalisation Costs	150
Revenue costs of capital programme	40
Further increases in balances	400
ODPM grant for regionalisation costs	-14
Revenue Contributions to capital	722
Further second homes expenditure	2
Proposed budget	60,265

2.6 In practice a Council Tax increase of exactly 1.5% is not possible, due to the need for a figure divisible by nine in order to set a tax in whole pence for all bands of property. The recommended budget of £60,265,000 is therefore equivalent to a Band D Council Tax of £52.11, which is a 1.6% increase.

Local Government Act 2003 - S.25

2.7 Under S.25 of the Local Government Act 2003 the Chief Financial Officer has to report to the Authority when setting its council tax on two issues:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget.

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

Robustness of estimates

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

Adequacy of reserves

2.9 Included within this draft budget are proposals to increase the level of reserves to £2m. Given the assessment of risk associated with the Authority's budget, as analysed in appendix 7, this represents an adequate level of reserves.

3. European convention on Human Rights and the Human Rights Act 1998

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

Recommendations

1 That the revenue budget as set out in Appendix 2, and incorporating the increase required to reach a total of £2m in reserves, be approved.

2 That the capital programme as set out in Appendix 3 be approved.

3 That the total budget requirement for the general expenses of the Authority for the year beginning 1 April 2005 be £60,265,000

4 That the Authority's basic council tax for the year beginning 1 April 2005 be £52.11

5 That the Authority's council tax for the year beginning 1 April 2005 for properties in each tax band be:

Band A	£34.74
Band B	£40.53
Band C	£46.32
Band D	£52.11
Band E	£63.69
Band F	£75.27
Band G	£86.85
Band H	£104.22

6 That precepts be issued totalling £31,624,171 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the Authority, in proportion to the tax base of each billing authority's area as determined by them which are set out below:

Basingstoke and Deane Borough Council	58,822.30
East Hampshire District Council	46,369.94
Eastleigh Borough Council	42,139.85
Fareham Borough Council	41,376.00
Gosport Borough Council	26,083.80
Hart District Council	36,156.40
Havant Borough Council	42,029.00
New Forest District Council	70,932.90
Portsmouth City Council	58,005.90
Rushmoor Borough Council	29,701.43
Southampton City Council	65,253.90
Test Valley Borough Council	44,324.00
Winchester City Council	45,677.95
	606,873.37

7 That the Prudential indicators set out in Appendix 5 be approved.

8 That the Treasury Management Strategy set out in Appendix 6 be approved.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

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

TITLE FILE

Fire - Budget 2005/06 - general papers

List of attached Appendices

1 Base Budget calculation 2005/06

2 Proposed detailed Revenue Budget 2005/06 (green)

3 Proposed Capital Programme 2005/06-2007/08 (yellow)

4 Report to Finance and General Purposes Committee (pink)

5 Prudential indicators 2005/06

6 Treasury Management Strategy 2005/06

7 Level of Reserves 2005/06

8 Notes from the statutory consultation meetings

Appendix 1

Calculation of the base budget

1. Summary of changes in the base budget

	£'000	£'000	%
Original budget 2004/05		58,368
Add full year costs of inflation to November 2004 prices - pay and prices		220	0.4
Add growth items allowed in the base budget:
Net cost of increments		22	0.0
Operational leasing		-9	0.0
Retained pay formula - number of incidents		110	0.2
Asset management costs		-160	-0.3
Full year effect of previous years' growth		-517	-0.9
Provision for inflation (pay and prices) from November 2004 to outturn 2005/06		1,255	2.1
Cash limited expenditure budget 2005/06		59,289
Pensions:
Full year cost of inflation to November 2004 prices	1
Increase in lump sums	-722		-1.2
Increase in ordinary and ill-health pension payments	115		0.2
Other	103		0.2
Provision for inflation November 2004 to outturn 2005/06	179	-324	0.3
Base budget 2005/06		58,965	1.0

2. Full year cost of inflation to November 2004 prices

2.1 The original budget has been increased by the actual costs of inflation to November 2004. Total inflation is £220,000 for pay and prices and £1,000 for pensions.

3. Increments

3.1 These are the gross cost of increments less savings on turnover. The net cost for firefighters is nil and for support staff is £22,000.

4. Operational leasing and asset management costs

4.1 It has been assumed that all new vehicles will be purchased. The reduction in the budget reflects the leases coming to an end during the financial year.

4.2 External interest payments and receipts are expected to decrease by a net £222,000 reflecting fewer long term loans taken out with the PWLB and the increased interest resulting from the creation of and increase in balances together with a projected underspend in 2004/05 which will increase balances further.

4.3 The latest estimate of the cost of making the statutory debt repayments and interest on loans taken out adds £62,000 to the base budget.

5. Retained pay - number of incidents

5.1 The budget is currently based on paying for 23,570 incidents. This was calculated using the agreed formula which takes the average of the last five years excluding the highest and lowest years to avoid any distortion of exceptional years.

5.2 The formula has been reviewed for 2005/06 and the average number of incidents rises to 24,743. To reflect this increase £110,000 has been added to the base budget.

6. Pensions

6.1 The overall pensions budget for 2005/06 consists of:

	£m
Pensions payroll	8.2
Lump sum payments	2.1
Transfer values paid	0.3
Transfer values received	-0.5
Employee contributions	-2.4
Total	7.7

6.2 The trends in pensions since 1999/00 are:

	Budget	Outturn
	£m	£m
1999/00	5.3	5.6
2000/01	5.8	5.1
2001/02	7.1	7.0
2002/03	7.5	7.2
2003/04	7.2	6.1
2004/05	8.2	7.6 estimated
2005/06	7.7

The significant drop in the budget between 2004/05 and 2005/06 is due to higher numbers and ranks of retirements being predicted for 2004/05 than in 2005/06.

7. Provision for future inflation

7.1 The provision for inflation from November 2004 to March 2005 has been calculated based on 3% for firefighters from 1 July, 2.95% for support staff, 3.1% for pension payments and 2.5% for all other costs. An increase in local government employer's pension contributions from 225% to 250% of employees' contributions has also been assumed.

8. Council Tax on second homes

8.1 It has been assumed for this draft budget that council tax on second homes will be received at the same level as in 2004/05. Expenditure on partnership working initiatives have been included at this level of £88,000.

Appendix 4

	Hampshire Fire and Rescue Authority
	Finance and General Purposes Committee
	19 January 2005
	Updated Draft Budget 2005/06
	Report of the Treasurer and Chief Officer

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

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

1. Introduction

1.1 This report seeks to address four main questions:

· What are the spending requirements for 2005/06 onwards?

· What possibilities are there for savings, and how can the Government's requirements to demonstrate efficiency be met?

· What should be the priorities for capital investment?

· How much is available from Government support and how much do members wish to seek from local taxpayers?

1.2 It seeks to do this in the context of the Financial Management Strategy which was agreed by the Authority at its meeting on 8 December 2004, and is attached at Appendix 4 by way of background to the approach taken.

2. Need to spend

2.1 Potential budget requirements can be split into four main categories:

· Base budget: This totals £59.0m and represents the cost in 2005/06 of continuing with the policies and future funding decisions made by the Authority when it set its budget for 2004/05. The base budget includes: inflation costs (including a provisional 3% for firefighter pay increases), projected pensions expenditure, and an increase in balances from £1.4m to £1.6m. It also assumes that the current level of capital investment will be continued.

A key factor is that the 2004/05 budget contains significant one-off costs to set up the Authority on a proper footing following its move to precepting status which, when netted off against those items which are due to start or increase in 2005/06, total -£517,000.

Overall, the base budget increase is 1%. Details are set out in Appendix 1. The three year budget projection presented to the Authority in December has not changed significantly and is therefore not reproduced for this report.

· Unavoidable costs: These arise principally from legislative changes or requirements. There are three significant issues:

- The requirement to repay transitional funding of £787,000. This has been deferred by the Government to 2006/07. It is intended to deal with this requirement through savings measures or from existing resources, by setting aside underspends in advance.

- The need to recognise that the Government's modernisation and regionalisation proposals will cost the Authority money (an estimated £150,000 in 2005/06) prior to any savings being achieved.

- There will be capital costs arising from the some of the vehicles which are coming to the end of their operational leases. It is proposed to deal with these costs through revenue contributions to the capital programme. For 2005/06 this represents £115,000 for some support vehicles.

· Typically, when preparing the forward budget, the opportunity is taken to identify and prioritise any new growth items. There was prudent investment in 2004/05 and it would be consistent with the modernisation programme and the Authority's own Corporate Aims to take every opportunity to re-deploy resources and reprioritise spending plans rather than seek new growth. Consequently, no new growth items are proposed.

· The Authority will also wish to ensure that it is suitably placed to deal with possible future calls on funds (ie as well as setting aside £787,000 to repay transitional funding). Examples of possible calls are uninsured losses, heavy pensions lump sum costs in a particular year, and to ensure maximum flexibility in dealing with capital investment requirements. These goals can be met by ensuring the right level of reserves and provisions are in place and by making some contribution to the capital programme through revenue contributions (which frees up borrowing approvals for future use or reduces future capital financing costs). It is proposed to add a further £400,000 to reserves in order to bring the total to £2m. Appendix 7 sets out the assessment of the required level of reserves for 2005/06.

· Notification has been just been received of a £14,000 grant from the ODPM in recognition of the new burdens in 2005/06 arising from the FiReControl project.

2.2 The above items total £59,541,000. As set out in paragraph 3.2, the draft budget is based on 1.5 % increase in council tax. On this basis revenue contributions to capital of £554,000 can be made. The draft budget can be summarised as follows:

	£000
Base budget	58,965
Regionalisation costs	150
Revenue costs of proposed capital programme	40
Further increase in balances	400
Less Fire ODPM grant	-14
Revenue contributions to capital	554
Draft budget 2005/06	60,095

2.3 The proposed draft budget is set out on Appendix 2. It will be presented in full detail to the Authority in February.

Savings and efficiency measures

2.4 Members will wish to be sure that appropriate savings and efficiency measures are taken in order to minimise the level of the council tax, demonstrate that value for money is being achieved and maximise the scope for shifting resources from `responding' towards `preventing' and `protecting' in line with the Corporate Aims. Accordingly, the opportunity is being taken to use any underspendings achieved in 2004/05 to optimise the position for 2005/06 and subsequently. At this stage budget monitoring data for 2004/05 suggests that it is reasonable to plan on the basis that:

· Sufficient savings can be achieved to set aside enough to repay the Transitional Funding Grant in 2006/07, as is likely to be required. Given the delay in repayment, the Authority could also take the chance to `pump-prime' some of the modernisation initiatives identified in the Integrated Risk Management Plan, subject to identifying future savings so the grant can be repaid at a later. Details of any such approach will be brought to members later as appropriate.

· In so far as further underspendings are achieved in 2004/05, revenue contributions to capital can be increased in line with members' long-term aspiration of funding as much vehicle acquisition as possible through revenue contributions in order both to minimise long-term cost of acquisition and to maximise flexibility to use borrowing for major capital projects. This is particularly important in 2006/07 when the Authority could otherwise be using unsupported borrowing should the proposed capital programme be approved.

2.5 The Authority is required to produce an efficiency plan demonstrating that cashable savings of 1.25% and non-cashable efficiency measures of a further 1.25% can be achieved in 2005/06. Full details have not yet been received, but the plan is not likely to have to be finalised until June 2005. It appears likely however, that efficiencies achieved in 2004/05 will be countable in this process, and by utilising savings already made and continuing to plan for diverting resources towards `preventing' and `protecting' initiatives, it should be possible to demonstrate this. A fuller assessment of planned spending on prevention (including from specific grant and the use of any additional council tax income from reduced discounts for second homes) will be made in due course.

3. Obtaining the funding

3.1 The Government has announced in the provisional settlement (subject to consultation but unlikely to change materially) that the formula spending share (FSS) for the Authority will increase, by 2.3% compared with 2004/05. This leads to an increase of £1.05m (3.8%) in the Authority's grant, from £27.49m (excluding transitional funding) in 2004/05 to £28.54m for 2005/06. This represents an FSS of £52.94m (+2.3%) for the Authority.

3.2 Total external funding will be £28.54m (Revenue Support Grant £9.35m plus National Non-Domestic Rates £19.19m), leaving the remainder to come from council tax. On this basis, an increase of 1.5% on the 2004/05 Council Tax of £51.30 was proposed as follows for consultation purposes on 14 January 2005:

	Budget	Budget increase	Estimated band D council tax	council tax increase
	£'000	%	£	%
Proposed budget 2005/06	60,095	3.0	52.07	1.5

Members should be aware that final taxbase figures are not due until 24 January so these figures are still indicative. However, any change is unlikely to be significant.

3.3 The proposed budget at £60.095m is £7.151m (13.5%) more than the Authority's FSS. Each £1m increase or decrease in spending has an impact of approximately £1.65 per year on the band D council tax.

3.4 The Government has reserve powers to cap authorities which propose council taxes which they consider excessive, and has indicated that council tax increases should be below 5%. Clearly, the increase proposed would be in line with that.

3.5 Trends in the Authority's budget are as follows:

				Increase in FSS
	Budget £m	% budget increase on previous year	Cumulative % budget increase on 1999/00	% in year	% increase on 1999/00
2000/01	41.2	4.1	4.1	4.6	4.6
2001/02	45.2	9.8	14.3	5.4	10.2
2002/03	48.9	8.0	23.4	5.2	16.0
2003/04	51.3	5.0	29.6	16.4	35.0
2004/05	58.4	13.8	47.4	4.0	41.3
Draft 2005/06	60.1	3.0	51.9	2.3	43.6

4. Base budget

4.1 The base budget totalling £58,965,000 has been prepared in the same way as last year and includes:

· the current year's original budget increased to the November 2004 price base;

· the net cost of salary increments;

· all known and projected pension costs (note: these are particularly hard to predict due to the discretion firefighters have over the exact timing of their retirement);

· an estimate of the costs of inflation from November 2004 to March 2006: 3% for firefighters' pay from July; 2.95% for support staff pay; 3.1% for pension payments and 2.5% for non-pay costs;

· increase in the retained pay budget in accordance with the agreed formula reflecting the increase in the average number of incidents;

· full year effect of previous years' growth items;

· planned increase in the level of reserves £1.4m to £1.6m in line with the risk assessment previously agreed;

· increases in the cost of capital financing;

· the assumption that income from council tax for second homes will continue to support partnership working initiatives.

4.2 The changes to the base budget are detailed in Appendix 1.

5. Capital

5.1 The proposed capital programme for the three years 2005/06 to 2007/08 is set out in Appendix 3. It is as presented to the Authority in December with the exception of the HQ phase 1 scheme where to be prudent the full cost is now shown although a grant from the ODPM (towards garaging costs) is expected. Also, £100,000 has been added as explained in paragraph 5.5, and the timing of the Cosham Fire Station scheme has been put back slightly. It also assumes some revenue contributions to capital spending from 2005/06 onwards, as shown in para 5.7.

5.2 Almost the same level of supported borrowing will be received in 2005/06 as in 2004/05 (£1,500,000 in 2005/06, £1,504,000 in 2004/05).

5.3 The capital grant for Home Fire Risk Initiatives will provide a significant level of funding to help achieve the Authority's most important Corporate Aims. The grants available for each year are:

£'000

2004/05 146

2005/06 146

2006/07 146

2007/08 292

Total 730

5.4 The vehicle programme for 2005/06 is as presented to the Finance and General Purposes Committee in October (with costs updated to 2005/06 outturn prices). The programme for 2006/07 and 2007/08 has been prepared and is included in Appendix 3. In 2006/07 the first major tranche of operational vehicles acquired through operational leasing will come to the end of the leasing period. It was always accepted that leasing was not the best long-term option for acquiring vehicles, though it was necessary in the financial circumstances at the time leases were entered into, and the costs of this policy will now impact. Following this:

· it has been assumed that replacements will be bought for the support vehicles, which are anyway near the end of their useful lives, though not yet at the age at which replacement would have been automatic were they not leased. This adds £115,000, £134,000 and £11,000 respectively to the vehicle replacement programme for the coming three years.

· it has been assumed that leases should be extended or renegotiated for the principal operational vehicles, which still have significant useful lives and would be expensive to replace. An operational lease agreement for breathing apparatus cylinders also comes to an end in 2007/08. If finance leases are entered into for these vehicles and equipment, this could add £28,000 to the capital programme in 2006/07 and £224,000 in 2007/08. At this stage they have been included in the proposed capital programme on this basis, and the Treasurer together with the Chief Officer is negotiating the relevant leases as agreed by the Authority on 8 December.

In order to avoid constraining the flexibility available for other capital projects, it is proposed to apply revenue contributions to capital to cover these commitments.

5.5 For planning purposes it has been assumed that:

· in addition to £115,000 revenue contributions to capital for support vehicles mentioned above, a further revenue contribution of £439,000 will be made in 2005/06 towards the financing of the core vehicle replacement programme. The effect of this is to increase the total size of the capital programme and, therefore, the flexibility available for other major projects. A sum of £500,000 has been assumed from 2006/07 onwards.

· the proposed second fire station for Basingstoke will not commence.

· Phase 1 of the HQ development will start in 2005/06. Phase 2 (vehicle workshops) is not included in the programme at this stage as it is dependent on a business case being made and approved, but can be added in - should that approval occur - in time to ensure that HQ costs are minimised by combining the two contracts. However, in order to achieve this it will be necessary to:

- start work now on the design of Phase 2; and

- make a rapid decision on the business case, preparation of which will follow on from the report on the outcomes of the Best Value study of vehicle maintenance to be reported to the Performance Review Committee on 7 March. That will require this Committee be empowered to make that decision on 26 April rather than merely making a recommendation to the next meeting of the Authority on 1 June.

- Increase the capital programme for Phase 1 by £100,000 to allow the Chief Officer to pay up to this amount for fees for the design of the Phase 2 project to ensure that Phase 1 can be completed in the timescale required should the two Phases go ahead together.

· there may be some capital receipts to help with the programme. These cannot yet be quantified, but if they do not cover the gap in the availability of supported borrowing from 2006/07 then some retiming will be required if unsupported borrowing or further revenue contributions are to be avoided.

5.6 It will be seen from the budget monitoring report, also on this agenda, that it is proposed to establish a capital payments reserve from any underspendings over £787,000 from 2004/05. This will help reduce the level of unsupported borrowing in 2006/07 assuming the proposed capital programme is approved. The amount to be put in the reserve will depend on the 2004/05 outturn, but the budget monitoring report on this agenda suggests that £0.7m should be achievable.

5.7 The capital position can be summarised (excluding any capital receipts or further revenue contributions from the reserve if set up) as follows:

	2005/06	2006/07	2007/08	2008/09
	£000	£000	£000	£000
Balance of supported borrowing as at 1 April	2,582	1,820	-1,523	-1,740
Existing commitments	-571	-	-	-
Supported allocation	1,500	1,500	1,500
Revenue contribution for new vehicles	439	500	500
Revenue contribution for leased vehicles	115	162	224
Capital resources available for new projects	4,065	3,982	701	-1,740
Vehicle replacement programme	-845	-1,505	-1,506	- 522
BA cylinders			-35
HQ development - phase 1 plus phase 2 fees	-1,300	-2,000
Cosham Fire Station	-100	-2,000	-900
Balance of supported borrowing available as at 31 March	1,820	-1,523	-1,740	-2,262
Plus home risk fire initiative funded from specific capital grant	146	146	292

5.8 The revenue effect, should all the above be approved, would be £408,000 in a full year. This is lower than that reported in December due to the revenue contributions now assumed and would be lower still if further revenue contributions are applied from any underspendings in the current year.

5.9 In considering the capital programme proposals members will wish to take account of the Prudential Code for Capital Finance. The main objective of the Code is to provide a framework that will ensure and demonstrate that capital expenditure plans are affordable and all external borrowing and other long-term liabilities are within prudent and sustainable levels. To achieve this, the Code uses a set of Prudential Indicators which relate to capital expenditure plans, external debt and treasury management.

5.10 Appendix 5 summarises the indicators which the Authority needs to set on an estimated basis in approving the budget and capital programme and which will then be subject to monitoring during the year and approval at the year end. In compiling these figures it is assumed that the capital programme will be approved as set about above. In summary the programme proposed can be judged to be prudent as defined by the requirements of the Code.

6. Treasury Management Strategy

6.1 The Authority is responsible for approving the annual Treasury Management Strategy. This is attached as Appendix 6 for members' consideration.

7. Consultation

7.1 Consultation with trade unions and with business community and council tax payer groups took place on 14 January, using the proposed 1.5% Council Tax rise. The results of that consultation will be reported orally.

8. European convention on Human Rights and the Human Rights Act 1998

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

Recommendations

1 That this Committee advises the Authority of its preferred level of budget for 2005/06 and any factors to which it would like to draw attention

2 That the Authority be recommended to approve the Capital Programme and associated Prudential Indicators (Appendices 3 and 5)

3 That the Authority be recommended to approve the Treasury Management Strategy (Appendix 6)

4 That the Authority be requested to give delegated power to the Finance and General Purposes Committee to decide at its meeting on 26 April 2005 whether to proceed with Phase 2 (the workshops building) element of the headquarters project.

5 Note that the final budget and council tax be set by the Authority at its meeting on 9 February 2005.

Appendix 6

Treasury Management Strategy 2005/06

1. Introduction

1.1 The Authority has to approve an annual Treasury Management Strategy. The strategy covers capital finance and debt, interest rates and borrowing strategy and the investment of surplus funds.

2. Capital finance and debt

2.1 Total capital expenditure in 2005/06 is estimated to be £3.077m which will be financed through a combination of loan, revenue contributions, capital grant and capital receipts.

2.2 Since the Authority was established, 12 long-term fixed-rate loans totalling £4.75m have to date been taken from the Public Works Loan Board (PWLB).

3. Interest rates and borrowing strategy

3.1 The Authority borrows for two main reasons:

· To finance capital expenditure (see 2.1)

· To meet short-term cash requirements, for example on days when salaries are paid.

3.2 The Authority borrows from two main sources:

· The PWLB to finance capital expenditure, normally long-term at fixed rates.

· The County Council at variable rates based on local authority seven day notice rated. This can be used to meet short-term cash requirements, or to finance capital expenditure when circumstances are appropriate.

3.3 Interest rates on the Authority's long-term debt portfolio from the PWLB currently range from 4.5% to 5.875% and the weighted average is 4.91%. Current rates on fixed-rate PWLB loans range between 4.55% and 4.65%, depending on maturity. These rates are at historically low levels.

3.4 Although the recent trend has been down, economic forecasters are expecting long-term interest rates to rise over the next two years, although the pace of such a rise is likely to be very slow. Base rates and other short-term rates are expected to peak at no higher than 5%.

3.5 Until now the Authority's borrowing strategy has been based on that of the County Council. For a number of years the County Council has borrowed long-term in small amounts, maintaining as far as possible the balance between long-term fixed-rate debt, which provides budget stability and protection against rising interest rates, and short-term temporary debt, which enables advantage to be taken of falling rates. It is suggested that this strategy should be retained by the Authority.

4. Investment of surplus funds

4.1 In line with the budget proposals the Authority will aim to have accumulated balances of £2m by 31 March 2006. However, during the year cashflow requirements will mean that there is no scope for any direct long-term investment on the money markets. Therefore, the Authority will invest all its surplus funds with the County Council, earning interest based on the local authority seven-day notice rate.

Appendix 7

Level of Reserves 2005/06

1. The Local Government Act 2003 requires that the Treasurer assess the financial risks faced by the Authority and makes recommendations based on this as to the appropriate levels of resources required to be held against these risks.

1.1 In considering financial risks, a distinction must be made between:

· A provision, which is made for a known and quantified expectation of costs. It is usual, for example, to hold some provision in the Authority's accounts in respect of specific known claims against the Authority, which are not covered by insurance.

· On the other hand, reserves are set up against the possibilities of future costs that are not yet expected nor quantified, eg the likelihood that there will be more uninsured claims in future.

2. Level of reserves required

2.1 The approach taken in this paper is to assess the risks of increased expenditure that the Authority faces during any given year. Some adjustment is then appropriate given that:

· there is a much smaller chance that all identified risks will occur in the same year; and,

· the use of reserves is not the only means of meeting such pressures. Savings/transfers from underspent budgets are preferable, and the Authority does have some temporary borrowing powers which could be used if necessary, together with other assistance available through the flexible use of capital funding.

2.2 The main factors used to evaluate the main financial risks facing the Authority, together with the suggested amounts required to cover them, are summarised in Sections 3-9.

3. Pensions fluctuations

3.1 Firefighters have discretion to retire with a pension when they choose to after the age of 50 (usually before 55 but can be later with approval) with 25 years' service and some also retire earlier due to ill health. The budget is set based on an estimate of likely retirement numbers, informed by past trends. For example in 2003/04 pension lump sum payments of £2.3m were budgeted for, but if all firefighters who could retire did so as early as possible the cost would have been £4.9m (mainly for lump sums, but also to cover the cost of paying pensions earlier). In the event, pensions were underspent by £1,135,000 in 2003/04 due to fewer firefighters than expected choosing to retire. Since 2000/01 the lump sum budget has been up to 18% (£389,000) different from the estimate. It appears reasonable, therefore, to set the likely worst case situation at 25% of the difference between `maximum' lump sums and estimated lump sums, ie £650,000.

3.2 There is also some volatility in transfer values paid and received. Around £0.5m can be expected in each direction, but it depends on the balance of numbers between those leaving Hampshire for other brigades and those coming to Hampshire from elsewhere. Historically, variations have tended to increase net income, but this could change. To allow for 25% fewer transfers in and 25% more transfers out in a year would require a reserve of £250,000.

4. Inflation risk: Pay

4.1 There may be a need during the year to meet the costs of a pay award not known at the time of setting the budget. The application of formula approaches could minimise this effect, but some impact is likely with firefighters' pay awards taking effect from July, ie with a substantial first year impact but with a good chance that the figure will not be known in February when the budget is set. Non-uniformed staff pay is more likely to be known in advance, given an effective date of awards of 1 April - though, there have been occasions in recent years when the pay award has not been agreed until much later than this.

4.2 Here it is felt that a reserve equivalent to an additional 1.5% of firefighters' pay is sufficient, ie £300,000. Any unknown factors in non-uniformed pay can be dealt with by way of a provision as part of the budget setting process if necessary. This is not an issue for 2005/06 as the level of non-uniformed pay award is already known (2.95%).

5. Uninsured risks

5.1 Although the Authority has insurance in place, there remain risks. There was a period when the Authority effectively became uninsured from April 1997 to June 2001 due to its primary insurer going into liquidation. There are also some uninsured risks, e.g. for employment practice issues; and, if there are higher than budgeted levels of insurance claims, then there will be higher excess costs to pay. This is one of the harder areas to assess, but based on the historic number of uninsured risks tending to come forward and the continuing trend towards more litigation, £600,000 is recommended.

6. Extremes of weather

6.1 Unusually hot dry summers, wet winters and storms can all lead to additional operational costs, primarily associated with increased activity by retained firefighters. This is recognised under current arrangements through a protocol with constituent authorities which builds in a budget variation for increases in the number of incidents (though with the first 5% of any increase absorbed by the Authority). Historically, the highest variation was 16.5% in 2001/02, but this was exceptional, the second-largest variation in a year being 6%, and an anticipated variation of up to 10% is considered sufficient. This would require £220,000.

7. Other inflation

7.1 There is some risk attached to non-pay inflation levels: for example, insurance and fuel costs. To allow for a possible 10% increase in these heads over and above the budgeted level of inflation would require £90,000.

8. Regionalisation

8.1 The increasing impact of the regional agenda leads to additional uncertainties. For 2005/06 this should be adequately covered by the specific revenue budget provision of £150,000. This will, however, be an area to keep under review.

9. Capital Programme issues

9.1 Another significant development over the past year has been the firming up of a more ambitious approach to capital spending with a move away from leasing vehicles and the initiation of Headquarters developments. This has led to the agreement of a Capital Programme which should balance if sufficient capital receipts can be generated. There is, however, a risk that this will not be achievable. If so, this could be dealt with in terms of pure financial risk by re-timing projects, but if members wish to guard against the service impact of any such re-timings, it would make sense to take some account of Capital Programme risk in deciding on the level of reserves. It is difficult to rationalise a formula-based approach to this, but with most years likely to feature a major scheme worth around £2m separate from the comparatively routine vehicle replacement programme, a "safety net" equivalent to 25% of this - ie £500,000 - might sensibly be built into the overall assessment.

10. Conclusion: level of reserves

10.1 Bringing all these factors together leads to a `maximum exposure' of £2.6m as set out in Table 1. However, as mentioned above, other funding sources may be available, and it is not likely that all these problems will occur in the same year. That is illustrated historically by the fact that the Authority's outturn position has very rarely resulted in an overspend. In theory it would probably be reasonable to discount the level of reserves required by 50% for the improbability of simultaneous recurrence of problems. However, it is considered sensible to take a more cautious position so a reduction of only 25% is proposed at this stage: this can be revisited if the Authority's budget performance continues to be healthy. This would suggest than an appropriate level of reserve is £1,960,000. Given the imprecise nature of the assessment, it is reasonable to round this up to £2m. Naturally, the level can be kept under review in light of both experience and variations in factors such as uninsurable risks and inflation rates.

10.2 This would result in reserves at 3.3% of annual spend. This is an increase over the previous figure of £1.6m, but still appears to be a somewhat lower proportion than for most other fire and rescue authorities.

10.3 This is a relevant background factor, though not a determinant of good practice as it may be for example that less strict control of budgets is in place in such authorities, and Hampshire should also gain through the `economy of scale' in spreading risks across a larger spending base than most.

10.4 Table 1: Summary of Factors

Factor	Assessed impact £000
Pensions: payments	650
Pensions: transfers	250
Inflation: pay	300
Uninsured risks	600
Extremes of weather	220
Inflation: other	90
Capital factors	500
	2,610
x 75%	1,960
Nearest £100,000	2,000

10.5 Accordingly, the budget for 2005/06 has been set on the basis of providing for a £2m level of reserves.

Appendix 8

Statutory consultation meetings held 14 January 2005

Summary of the main issues raised

Meeting with trades unions representatives (1030hrs - 1130hrs)

Present:

Cllr Heath - Chairman of Finance and General Purposes Committee

Cllr Barron - Spokesperson for Liberal Democrat Group

Cllr Horne - Spokesperson for Labour Group

Rick Noble - Chairman, Retained Firefighters Union (RFU)

Andy Needham - Secretary, Retained Firefighters Union (RFU)

Binzy Reynolds - GMB

Dave Norgate - Fire Officers' Association (FOA)

Dave Curry - Deputy Chief Officer

Paul Carey-Kent - Deputy Treasurer

David Howells - Director of Corporate Services

A short presentation was given by Paul Carey-Kent and David Howells which was based on the report on the Draft Budget 2005/06 that was due to be presented to the Finance and General Purposes Committee on 19 January 2005. Questions were taken during and after the presentation.

Overall, there was general satisfaction with the proposals. The following issues/comments were made:

Recruitment of retained firefighters: Clarification was sought that the specific funding for recruitment and retention initiatives would continue into 2005/06 and beyond. This was confirmed.

Budget for retained firefighters pay: Clarification was sought on the funding formula for retained firefighters' pay; specifically, whether the budget allocation would determine or constrain the filling of vacancies on the establishment. Assurances were given that while the budget is not directly set by the fixed costs of maintaining full establishment, there is sufficient flexibility in the total budget allocation - which includes the variable costs of attending incidents - to accommodate in-year increases in the number of retained firefighters in post.

Repair and maintenance of buildings: Concern was expressed about the perceived deterioration in the condition of buildings - particularly the older retained fire stations. Representatives asked whether any increases in funding for the repairs and maintenance of buildings was proposed. While there were no specific increases proposed for 2005/06 and beyond, Members and officers felt that there may be scope to allocate some additional funding from general contingencies and this will be put to the Finance and General Purposes Committee. It was further explained that the comprehensive condition survey of buildings is to be regularly updated and that the Asset Management Working Group would determine priorities for the repair, maintenance and improvements to buildings in October each year with any major funding needs identified at an early stage in the budget preparation process.

Headquarters and Training Centre Development: In response to questions about the potential to relocate vehicle workshops from Winnall, Winchester to the Headquarters site; it was explained that this rested on the outcome of the Best Value Review of Workshops and the subsequent presentation of a `business case' to justify the proposal and this is due to be considered by the Finance and General Purposes Committee in April 2005.

Post meeting note:

Written comments were received on 18 January 2005 from the Secretary of the Hampshire Branch of the Fire Brigades Union. Two concerns were raised:

"It is shown that Cosham Fire Station is in the capital programme of £3m. What happened to the £3m budgeted last year for this?"

A detailed response was given explaining that in the approved current Capital Programme the Cosham Fire Station scheme was included as a "2005/06 Start" and that is still the case in the draft Capital Programme being recommended in the Capital Programme for 2005/06 to 2007/08 - with the same provisional value of £3m.  Nothing has changed. It was pointed out, however, that we are unlikely to see a start on construction works in the financial year 2005/06, but we will be incurring professional fees associated with securing a new site.

"There is no budget amount for legal expenditure, why not?"

It was unclear what led to this particular concern and a response was given confirming that provision is made under budget headings for: `supplies and services' and `other contracted support services'.  There is provision for legal costs in respect of: corporate governance arrangements; technical fire safety (advice and enforcement action); litigation costs for specific cases; advice on contractual arrangements; for insurance issues; and ad hoc advice on new and emerging legislation. 

Meeting with representatives from the business, residents and taxpayers communities (1130hrs - 1400hrs)

Present:

Cllr Heath - Chairman of Finance and General Purposes Committee

Cllr Barron - Spokesperson for Liberal Democrat Group

Cllr Horne - Spokesperson for Labour Group

Ted O'Toole - Chair Hampshire Federation of Residents Associations

David Webb - West Bedhampton RA

Peter Turnbull - Langstone RA

David Thomas Langstone RA

Tony Higham - Hayling Island

Keith Chessell - Warblington and Denvilles RA

Colin Richards - North Hayling Island RA

Terry Tingey - Fleet and Church Crookham RA

Audrey O'Toole - Fleet and Church Crookham RA

Lynn Lockyer - Eastleigh and Test Valley South PCT

Peter Scores - Blackwater Valley (Enterprise First)

Cllr E Byrom - Hampshire Strategic Partnerships

Paul Carey-Kent - Deputy Treasurer

David Howells - Director of Corporate Services

Dave Norgate - Divisional Officer (Community Safety)

A short presentation was given by Paul Carey-Kent and David Howells which was based on the report on the Draft Budget 2005/06 that was due to be presented to the Finance and General Purposes Committee on 19 January 2005. Questions were taken during and after the presentation.

Representatives for the various communities appeared to be generally satisfied with the proposals for the budget which, if approved, would result in a Council Tax increase of 1.5%. Several representatives congratulated the Authority in keeping the proposed increase so low and were complimentary about the clarity of the report on the draft Budget 2005/06.

The discussions that took place after the presentation covered a wide range of issues and the questions and comments were not all specifically concerned with the budget proposals. As a result, the representatives felt that there would be merit in future consultation meetings and visits to Headquarters and fire stations to include short presentations and demonstrations aimed at increasing awareness on the services that the Authority delivers, its performance and future plans. This suggestion will be considered as a potentially useful addition to our wider consultation strategy and programme of activities.

The following issues/comments were made in relation to the proposed budget:

Costs of regional collaboration: Representatives were re-assured to be told that the proposal to set aside a specific sum for regional collaboration activities should not be regarded as an indication of any intent to support the formation of a "Regional Fire and Rescue Service". It was made clear that the proposed sum is purely to support the costs of managing projects under the six regional work streams that are examining the potential benefits of economies of scale that collaborative working might produce in some areas. Training and procurement were mentioned as the two areas likely to provide improvements. In relation to the development of the new regional control centres, the opportunity was taken to explain that the set-up costs would be funded by the Government and that any major financial consequences of the project may be funded under the `new burdens' procedure. Representatives were told that the move to regional control centres is considered to be a `major risk' for the Authority because of the uncertainties over the timing and the need to continue to maintain and operate the existing control room in the meantime.

Civil protection: Representatives sought clarification about the funding for civil protection including dealing with the threats of terrorism and flooding. It was explained that the Authority has a strategic role to play in providing emergency cover beyond the boundaries of Hampshire and that new specialist vehicles had already been allocated and funded by the Office of the Deputy Prime Minister. It was explained that additional funding is likely to granted for accommodation works for these vehicles.

Vehicle Replacement Programme: Representatives recalled that at last year's consultation meeting, Authority Members had said it would not be possible to begin to fund the acquisition of vehicles from the revenue budget (in order to avoid the costs of borrowing) in 2004/05. They were pleased to see that there is now scope to make a start on this preferred method of funding from 2005/06.

Home Fire Safety Checks: In answer to questions about this initiative, representatives were informed that the Government is to make specific grants over a four-year period for carrying out home fire safety checks and fitting smoke alarms.