Contact: Jon Pittam, ext 7400

1. Summary of overall position

1.1 This report proposes the recommendations to County Council on the 2005/06 budget and the council tax, based on the budget guidelines approved on 13 December 2004. The proposals take account of the consideration of the guidelines by the relevant Policy Review Committees and Executive Members.

1.2 The budget guidelines anticipated a budget increase of 4.9% and a consequential council tax rise, after the proportional use of the grant equalisation reserve, of 4.6%. Since then an extra £800,000 in the final grant settlement, an increased net taxbase, some further net savings, and use of balances has resulted in a council tax rise recommended of £29.25 (3.5%). This is in line with the December 2004 retail price inflation, and will take the Band D council tax to £869.40. It is also the lowest local tax rise since the 1974/75 reorganisation, matching that in 1984/85 which was also 3.5%.

1.3 This has been achieved by using cash efficiency savings and the redeployment of other resources to meet all new service pressures and demands above the full passported cash increase of 6.4% for Social Care and the base budget for all other services. The Schools Budget has also been fully passported. The overall level of efficiency and other savings in service budgets redeployed is £7.6m. In addition further SAP benefit realisation savings of £0.8m are redeployed within the existing budget strategy. Total revenue savings and equivalent redeployments are £8.4m. A further £4.5m of efficiency savings have been achieved by absorbing cost increases mainly arising from staff salary increments and regradings.

1.4 Another £3.0m of corporate savings are proposed. Total savings are therefore £15.9m. Some of the corporate savings will support new spending proposals but £2.1m will be used to reduce the council tax by 0.5%.

1.5 The underlying level of budget increase is lower than that set in the budget guidelines of 4.9% because of the additional savings, and is now 4.7%.

1.6 The final budget is therefore £1,107.9m, which is £49.8m more than the adjusted budget for 2004/05. This is £39.9m (3.7%) more than Formula Spending Share (FSS), the Government's assessment of need to spend for grant distribution purposes.

1.7 No further budget consultation has been held but the results are consistent with the views of the various representative groups met during the Autumn.

1.8 The Minister has written to all local authorities stating that `I am writing to make it clear that we expect all local authorities to budget prudently, and that the average council tax increase in England will be less than 5% next year. We are prepared to take tougher capping action next year than we did in 2004/05 to deal with excessive budgets'. `It is also the case that all authorities....must deliver efficiency gains'. There is no risk of capping under these criteria and indeed significant efficiency gains and savings have been delivered.

1.9 A three year budget view continues to be necessary, because of the one-off nature of extra Government grant to keep council tax rises below the required 5% average - but for 2005/06 only. The grant equalisation reserve will be used up over the next three years to match the anticipated grant loss. The underlying council tax rise without the use of the reserve in 2005/06 would have been 5%.

1.10 The three year budget plan has to take account of the uncertain position for 2006/07 when further changes will occur. The starting point is likely to be a council tax rise of around 7%. The planned use of the grant equalisation reserve will reduce this to 6.7% (the 1.5% reduction in 2005/06 also has to be replaced from the reserve in 2006/07). This does not accord with the Minister's short-term view that `high council tax increases are a thing of the past'

1.11 The budget strategy for 2005/06 is to provide for the lowest possible council tax rise; with no cuts in services; and with improvements met by cash efficiency savings, the redeployment of other existing resources and use of growth available within the passported cash increases for schools (4.9%) and Social Care (6.4%).

1.12 The budget provides for:

· Schools budget increase of £26.4m (4.9%) to fund the statutory required minimum funding guarantee. It also provides for £3.8m of further growth.

· An overall cash increase of £21.9m (7.5%) in Social Care, which is £8.9m more than its base budget. Total growth of £14.2m has been met from the use of the full FSS cash passport and increases in specific grant.

1.13 The annual review of charges and maximisation of income has also been incorporated.

1.14 Additional growth items of £1.45m (Table 18) have been more than offset by additional savings and use of balances.

1.15 The overall position compared with 2004/05 and the provisional settlement 2005/06 is as follows:

Table 1: Overall summary of 2005/06 budget proposal

1.16 The 2004/05 adjusted figures in Table 1 reflect transfers of specific grant into FSS and formula grant, principally on Social Care, and the transfer of responsibility for Magistrates' Courts to central government.

1.17 The extra `one-off' grant in 2005/06 is estimated at £7.3m before allowing for the effect of floors and ceilings. This will need to be replaced in 2006/07, unless added to current Government spending plans. The loss of Education damping grant in 2005/06 is estimated as £7.1m. The amount withdrawn from the grant equalisation reserve in 2005/06 and subsequent years takes into account actual and anticipated losses of grant from 2005/06 onwards.

1.18 Despite still having the fifth lowest grant increase amongst counties in 2005/06, it is anticipated that the County Council's council tax rise will be in the lower quartile keeping the absolute council tax within the corporate strategy of being in the lower quartile. Despite its low grant support and council tax levels the County Council continues to provide excellent services under the Comprehensive Performance Assessment.

1.19 This summary paragraph contains the key issues in the 2005/06 Budget. The remainder of the report provides more detail and consists of the following paragraphs:

· revised estimates 2004/05 (paragraph 2)

· final local government finance settlement 2005/06 (paragraph 3)

· 2005/06 base budget (paragraph 4)

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

· efficiency savings, value for money, and efficiency plan (paragraph 6)

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

· workforce plan (paragraph 8)

· additional resources (paragraph 9)

· additional budget allocations (paragraph 10)

· performance and risk management (paragraph 11)

· balances (paragraph 12)

· earmarked reserves (paragraph 13)

· overall budget proposals (paragraph 14)

· three year budget plan (paragraph 15)

· treasury management strategy (paragraph 16)

· prudential code for borrowing purposes (paragraph 17)

· Local Government Act 2003, Section 25 Statement (paragraph 18).

2. 2004/05 Revised estimates

2.1 There is no formal review as budgets are monitored during the year and changes reported as they occur. All services are controlling estimates to their cash limits for 2005/06 with a risk of year end overspends on Social Care which would normally be carried forward and recovered from its cash limit in 2005/06.

Education

2.2 Pressures on the cash limit of £0.6m, mainly from ICT costs on services to schools and support services and the end of dividend payments from Vosper Thorneycroft Southern Careers following changes in provision of the Connexions service, have been offset by use of additional childcare grant and the general contingency.

Environment

2.3 The projected spending is £0.6m more than the cash limit mainly because of higher energy costs on street lighting and repairs to the Micheldever depot. Some savings have been found leaving a net pressure of £0.4m which will be met by a transfer from the locally resourced capital programme provision.

2.4 Cabinet is also asked to agree to the release of £300,000 from the projected underspending on the disposal of abandoned vehicles, to meet additional expenditure in connection with the submission to Government of revised proposals for South Hampshire Rapid Transit

Policy and Resources

2.5 The revised budget is £0.2m above the cash limit slightly more than previously reported because of higher coroner's spending and corporate estate security costs. Equivalent savings will need to be identified over the remainder of the financial year.

Recreation and Heritage

2.6 Action is being taken to reduce a projected overspend of £0.4m. This is due principally to additional spending on books for newly refurbished libraries (£250,000) and income lost from closures during the library refurbishment programme. Action taken includes deferring £250,000 (half of the planned £500,000 transfer to capital from the book fund) until 2005/06 to allow books and other materials to be purchased for new and refurbished libraries and by freezing part of the revenue funded capital programme (£150,000).

2.7 A separate proposal is made later in the report to provide Libraries with a one-off injection of £250,000 towards the book fund to compensate for the deferral of this transfer.

Social Care

2.8 Additional pressures from more children in non-county and foster care placements (£2m) together with more clients with a learning disability and a Supporting People pressure (£1.9m) has been partly offset by an unallocated contingency of £2.9m leaving a projected net £1m pressure.

2.9 A contingency against this potential overspend has been set aside within the passported cash increase for 2005/06.

2004/05 carry forwards

2.10 Proposals are made later in the report to cover the potential risk of any service overspends in 2004/05, particularly on Social Care which may affect budget decisions in 2005/06. Policy and Resources plan to carry forward underspendings of £825,000 for use in 2005/06 and 2006/07, but there are no other proposals to carry forward savings, so that any savings that do occur at the end of the 2004/05 financial year will accrue 50% to the relevant service and 50% to corporate balances, in accordance with the agreed budget policy.

Capital financing

2.11 Capital financing costs will increase by £0.3m because of a higher minimum revenue provision in 2004/05 as a result of more borrowing in 2003/04 than originally budgeted, to take advantage of increased Government borrowing approvals.

Interest on revenue balances

2.12 Interest on bigger revenue balances than anticipated, partly from increased specific grants and favourable cash flow, will in turn add another £2m to balances.

Schools Contingency

2.13 A contingency of £1.1m was provided in the 2004/05 budget in case it was necessary to over passport the Schools FSS increase to meet additional special educational needs costs if the Government did not agree to waive its restriction on central spending increases in the 2004/05 budget. The Government did allow the increase so that the contingency was not required for this purpose. The contingency can now be added back to balances. It had already been deleted from the 2005/06 base budget projections.

Library VAT refund

2.14 As previously reported to Cabinet a VAT refund of £0.4m over several years has been achieved by the taxation officer in County Treasurer's. This covered VAT on income for charges for hire of CDs, DVDs etc. Recreation and Heritage has an efficiency saving of £170,000 pa in additional income as a result of the recurring reduction of VAT payments to the Inland Revenue. The retrospective rebate will accrue to balances.

2004/05 Government grant amending report

2.15 Cabinet will be aware of the recent amending report for 2003/04 which created retrospective adjustments to FSS and grant because of errors by Government in population data from the 2001 Census. This reduced the County Council's FSS by £1.7m but not its grant because of the general floor protection for 2003/04.

2.16 The Government has indicated that it also plans to amend the grant settlement for 2004/05 to correct similar errors in its population estimate for 2002. As there will be no general floor protection for the County Council in 2004/05 and because the grant change for 2004/05 cannot be accurately predicted from the 2003/04 figures (partly because of the national effect of the floors and ceilings regime), the County Council asked the Government to exemplify the effect on all local authorities when it announced the final 2005/06 settlement.

2.17 The Government has not done so, but provision has been made in the final accounts for 2004/05, and the estimated loss of grant is projected as £1.2m. This reduction in balances would not have been necessary if the Government had accepted that it should fund the losses caused by its errors - both in the overall size of the population and the retrospective impact on the distribution of an inadequate grant quantum.

Overall impact of 2004/05 revised budget

2.18 Services are expected to deliver budgets within their cash limits, with a risk of some overspend if pressures cannot be managed by the time the final accounts are completed.

2.19 Taking into account a number of other smaller changes, the overall position shows a potential net addition to balances of £2.2m.

Table 2: 2004/05 Revised Budget

2.20 The adjustment to the overall 2004/05 cash limit, comparisons of the revised estimates with the cash limit and an analysis of the major variations in spending projected in 2004/05 are set out in Appendix 2.

3. 2005/06 Local Government Finance Settlement

3.1 Cabinet received a presentation on the provisional settlement on 13 December 2004. The letter sent in response to the consultation is attached as annex 1 to Appendix 1, which contains the full details of the final settlement. A standard response was received (annex 2 to Appendix 1) which makes a mockery of the statement that the Office of the Deputy Prime Minister (ODPM) `will carefully consider the points you make'.

Response to consultation

3.2 The response makes no reference to:

· 2003/04 amending report - which remain unchanged

· 2004/05 exemplifications - not published

· Census changes not included in the 2005/06 settlement which would have advantaged Shire authorities as opposed to those which have been made that disadvantage Shire authorities

· Supporting People grant losses (£2m, or 5.6% for the County Council)

· the increase in ring-fenced grants and the introduction of dedicated schools grant in 2006/07

· inadequate FSS increase for environmental, protective and cultural services (EPCS) and highway maintenance

· inadequate recognition of the County Council's pioneering waste contract, when later schemes attract private finance initiative (PFI) credits

· inclusion of the Isle of Wight in the Hampshire area cost adjustment in 2003/04 which unfairly deprived the County Council of grant of £4m per annum

3.3 The response states `under our proposals Hampshire County Council has again benefited from an above inflation settlement representing an increase of 6% on a like-for-like basis compared with 2004/05'. This is plain wrong. The grant increase in the final settlement for Hampshire is 5.0%.

3.4 The response then reiterates the points made in the provisional settlement that local government is expected to contribute significantly to efficiency gains Government has set for the public sector, that Government departments `will be working in partnership with local authorities to help them achieve maximum efficiencies', `efficiency gains can be used for re-investment in front-line services' and that the average council tax increase in England in 2005/06 `should be less than 5%'.

3.5 Finally the ODPM say that `high council tax increases are a thing of the past. We are prepared to take even tougher action next year than we did in 2004/05'. Unfortunately the ODPM does not appear to have changed its own spending plans for 2006/07 which imply a national average increase in council taxes of at least 7% in that year, or indeed not read or understand the County Council's response to the provisional settlement in which this was pointed out. It would be laughable if the Government was not also planning to require three year council tax forecasts as set out in a separate report to this meeting.

3.6 The Cabinet may wish to consider if it is worth writing again to the Government about these issues, sending a copy to Hampshire MP's.

3.7 The final settlement was announced on 27 January 2005 and details are shown Appendix 1. There are no significant changes in FSS.

Final Grant

3.8 Hampshire's grant in the final settlement has increased overall by a further £0.8m. The Government nationally overestimated the gross council tax base, and the County Council's relatively more than elsewhere. In the final settlement the tax base has been reduced with a grant increase to compensate.

3.9 Counties as a class overall lost £1.8m in grant, Surrey losing £2m, Kent and Hertfordshire £0.4m each. For once the County Council had the largest cash gain amongst all local authorities between provisional and final settlement. Despite these changes the overall grant increase from 2004/05 remains the fifth lowest of all counties.

Grant loss

3.10 The Government announced additional one-off grant in the provisional settlement, to keep council tax rises below 5%. There is no provision in government spending plans to replace this in 2006/07. The budget strategy must provide for the anticipated loss of £7m in 2006/07.

3.11 Since the grant formula changes in the 2003/04 settlement, the County Council has lost £29m grant (£21m in 2003/04, £8m in 2004/05). A further £7.1m has been lost in schools grant in 2005/06 taking the total grant loss to £36m. That is equivalent to 9% on the council tax over that three year period. The grant equalisation reserve was created in 2003/04 to smooth out the grant loss from 2004/05 onwards.

3.12 Future grant losses projected from 2006/07 include £7m from the one-off grant addition in 2005/06

Grant increase

3.13 The actual cash increase in grant in 2005/06 is £33m of which:

· £26.6m is to `match' Schools FSS - required `passport'

· £2.3m is to `match' LEA floor

· leaving £4m for all other services

3.14 But grant is not ring-fenced and Schools FSS is also `matched' by 36% from council tax.

Capping

3.15 The Minister for Local Government in confirming the final settlement said `Once again, this is a very good settlement for all local authorities and the eighth successive year we have provided local government with an above inflation grant increase. Given this substantial investment, we expect all authorities to budget prudently and minimise demands on their council taxpayers. We expect the average council tax increase in England to be less than 5% in 2005/06. Authorities should be in no doubt that we will again use our capping powers to protect council taxpayers from excessive increases. Indeed, we are prepared to take even tougher action than we did in 2004/05 if that proves necessary. There is no excuse for excessive council tax increases - we will not tolerate these either next year or in years to come'

3.16 There is no risk of capping as far as the County Council is concerned, despite an article in the Financial Times on 27 January 2005 suggesting otherwise.

Final figures

3.17 The final grant figures compared with the (adjusted) grant for 2004/05 and the provisional settlement for 2005/06 are as follows:

Table 3: Final settlement figures 2005/06

3.18 The assumed increase in the council tax requirement for spending at FSS is therefore 5.8%, or after allowing for the increase in gross taxbase, an increase of 5.1% in the Band D council tax. Though the overall increase in council tax if authorities increase their spending in line with FSS is 3.8%, within that sum the increase for County Councils is 5.1%, for District Councils -0.1%, Police authorities 2.3%, Fire authorities 1.1%. It is important to recognise therefore that the Government is not planning on the basis that county councils will increase their council taxes by less than 5% but on the basis that district council, police and fire authority increases should be lower than county council increases, producing an average below 5%.

4. 2005/06 base budgets

4.1 The base budget assumptions make allowance for pay awards of 2.95% (based on three year national pay settlement from 2004) and price increases at an average of 2.5%, together with a 1.5% increase in the employers' contribution to the Local Government Pension Scheme.

4.2 The adjusted base budget for services is £1,166m and the overall base budget is £1,095m after taking account of specific grants. This is an increase of 3.5% which represents the continuation of the current financial policies of the County Council.

4.3 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 A - E of Appendix 3, as reported to Policy Review Committees and as submitted by Executive members to Cabinet within the base budget guidelines.

5. Budget guidelines

5.1 The Cabinet set a provisional budget strategy on 13 December 2004 based on the following guidelines

· base budget for all services other than Schools and Social Care

· that following consideration by policy review committees, that Executive members approve service budgets within the budget guidelines for submission to the Leader and Cabinet in February 2005.

· that the Secretary of State for Education and Skills be notified by 31 December 2004 of the County Council's intention to passport fully the increase in the Schools Block for 2005/06

· that the Social Care Executive member be asked to prepare budget proposals within separate guidelines for children's and other adult client groups

· that all Executive members identify cashable efficiency savings of at least 1.25% (including the firm plans already made for SAP benefit realisation savings) on the basis that these savings could be used in final decisions to absorb pressures within the service or elsewhere, or to reduce the council tax (or any combination of these)

· that any proposals for additional spending above the base budget to be met from redeployments or proposed efficiency savings, or in the case of Schools Budget within the passported sum, should be accompanied by a summary business case containing clear financial and performance data setting out how performance will be improved and value for money achieved, and its links to the key aims of the Corporate Strategy

· that all Executive members meet their inescapable budget pressures and legislative requirements within the provisional budget guidelines with proposals for efficiency savings or redeployment of resources to offset any new spending priorities (excluding Schools)

· to confirm that the Social Care Executive member be asked to ensure that separate efficiency savings targets set by Government for Supporting People be achieved without additional cross subsidy elsewhere within older people and other adults, or additional council tax support

· that all Executive members report back on their annual review of charges and maximisation of income

· that Executive members also report back on the workforce implications of their proposed budgets as part of the process of linking workforce and financial planning

· that in view of the delay in setting firm budget guidelines because of the late grant settlement, not to proceed with holding a community workshop and telephone survey in January based on more specific proposals, but to consider what, if any, further budget consultation is required

5.2 Before considering the responses to the budget guidelines, it helps to set the scene by pointing out the cumulative cash increases targeted at services between the 2001/02 and 2004/05 budgets. These are set out in Table 4 below and show

· Government's increased use of specific grants over the period to direct funding where it wants, especially direct to schools and for certain transfers of funding from Government open-ended benefits systems to cash limited Social Care budgets

· Social Care will have increased its spending by 50% (after function changes) and the waste contract will have increased by 44%

· both are more than twice the increase for other services

· the inflation rate in Government terms, over this period is just over 10%

Table 4 : Summary of cumulative cash increases 2001/02 to 2004/05 Budgets

5.3 The Executive Member, Social Care draws the Cabinet's attention to the pressures to be dealt with and recommends `that, given the context, the `mid' and `base' budget options should not be pursued'. The Leader has therefore agreed that the full increase in the FSS for Social Care should be `passported' although there is no Government requirement to do so, as with the Schools FSS.

5.4 The Executive Member, Social Care has also not been able to ensure the avoidance of additional cross subsidy from adult's services to offset pressures from the Government's cut in the Supporting People grant. This has added a £1m additional pressure to be absorbed within the passported cash increase, with its share met by a council tax increase.

5.5 Apart from Supporting People, the guidelines have been met with the further exception of Education

5.6 The acting Executive Member, Education has disclosed a total net service pressure of £1.3m. Efficiency savings and other savings of £0.7m have been identified leaving a net budget gap of £620,000.

5.7 To be consistent with all other services Education, within the budget guidelines would be expected to find equivalent efficiency savings or the redeployment of other resources to meet its additional pressures. From Table 4 it can be seen that Education, other than schools, has had higher budget increases than other services, including school budgets, (41.5% compared with 35.1% on schools and 22.1% on all other services). In those circumstances the Leader has agreed that further savings or redeployments should be sought to meet Education's additional pressures within its cash limit, although some corporate support may also be appropriate.

5.8 It is therefore recommended that:

· £200,000 be provided corporately

· Education find the remaining £420,000 of its identified budget gap. This consists of £280,000 (the balance between its cash efficiency savings target of £780,000 and £500,000 found) and a further £140,000 towards extra pressures. This is expected to be found by staff efficiency and other savings (vacancy management etc). The savings target is more than underpinned by a retained central contingency (£376,000) and projected surpluses on services to schools at 31 March 2006 (£330,000) against which any shortfall in achieving the savings target would be a first call.

5.9 Assuming the adjustment for Education, budgets will have been submitted within the guidelines as summarised next. £2m has been diverted from the budgeted contribution to the job evaluation transitional costs reserve to Social Care to meet the continuing costs of market supplements agreed in 2004/05. This will be taken off any further increase for Social Care as a result of job evaluation. In addition to full passport, Social Care has therefore benefited also from the additional £2m allocation, but to meet costs agreed since the last budget was approved.

Table 5: Budget Guidelines - service cash increases 2005/06

5.10 Table 5 shows the effect of the budget strategy and priorities given to schools, Social Care and waste budgets.

5.11 All Executive members were asked to meet all inescapable budget pressures and legislative requirements within the budget guideline cash limits, with proposals for redeployment of resources to offset any new spending priorities. A 1.25% efficiency target was set for all services based on staffing and procurement budgets. With the adjustment recommended for Education, these will have broadly been achieved. But such savings have been used to fund additional pressures leaving no scope to reduce the council tax rise required. The 1.25% level represented the anticipated 50% cash saving requirement, within the Government's overall efficiency target of 2.5% for local government.

5.12 The total redeployments achieved, and the extra pressures so met within the budget guideline level are:

Table 6: Summary of additional budget pressures 2005/06 met by cash efficiency savings and the redeployment of resources

	£'000
Education	1,120
Environment	1,963
Policy and Resources	667
Recreation and Heritage	730
Social Care	3,150
	7,630

5.13 The total costs absorbed adjusted figure within the budget guideline for Education includes the £0.2m of pressures supported corporately (paragraphs 5.8 and 5.20).

5.14 Appendix 4 summarises all the proposals for new growth within the budget guidelines, including the cash passported increases for Schools and Social Care, and the redeployments applied to absorb the extra costs shown in Table 6.

5.15 The next part of this report summarises the major changes and issues for each service.

Schools

5.16 The budget provides for

· the minimum increase in the schools formula spending share (SFSS) of 5% per pupil compared with a national average increase of 7% per pupil (this reflects the grant floor for Schools following the formula changes from 2003/04)

· the requirement from the Secretary of State to passport fully the increase to schools delegated budgets so that each

- secondary and special school has a minimum funding guarantee (MFG) of a 4% per pupil increase and each primary and nursery school a MFG of a 5% per pupil increase

· taking account of the minimum funding guarantee, inflation costs and pupil number changes results in new growth of £3.8m for schools within the `headroom' available

· the `headroom' has been allocated to delegated schools budgets (£2.9m) to cover secondary exams, additional non-teaching support staff, business rates revaluation, special education needs and to central spending (£0.9m) for a new early years centre, special education needs and Education otherwise than at school.

5.17 In addition to the passported cash increase schools also have increases in standards fund and school standards grant, all met by direct specific grants.

5.18 The total increase for Schools is:

Table 7: Increase in Schools Budget 2005/06

Passported cash increase		Specific Grant		Total
£m	%	£m	%	£m	%
26.4	4.9	4.4	5.9	30.8	5.1

Other Education

5.19 Additional pressures of £1.3m were identified, principally loss of the VTSC dividend (£0.1m), additional ICT costs (£0.6m) and to replace central Government funding through the Youth Offending Team for the Duke of Edinburgh's Award (£140,000). Some savings of £0.2m were identified leaving net pressures of £1.1m unfunded.

5.20 As explained earlier £0.5m can be offset by efficiency savings identified, £420,000 to be found within the budget guidelines cash limit, with £200,000 met by additional resources centrally.

Environment

5.21 Total pressures of just under £2m above the base budget have been identified.

5.22 £1.1m is on highways maintenance. £0.6m arises mainly from additional inflationary costs, (including street lighting energy contracts and as a result of the diversion of the 2004/05 inflation allocation to cover higher costs on management support) and £0.3m for the development of the asset management approach to highways maintenance.

5.23 Bus contract re-tendering and commercial service de-registration costs of another £0.3m have been met and £0.5m added to meet staff and information technology costs in management and support services.

Policy and Resources

5.24 Pressures totalling £0.9m have been met by using the central allocation of the passported increase for Social Care, by redeploying the targeted efficiency savings (other than the SAP benefit realisation savings) and by a proposed continuation of Invest-to-Save funding.

5.25 These include:

· £250,000 towards additional asbestos and Disability Discrimination Act (DDA) management

· £265,000 to continue the additional staffing teams to secure reductions in business rates and to increase capital receipts, funded on an Invest-to-Save basis from future additional income

· £110,000 for occupational health to meet additional costs, subject to meeting future business plan targets to reduce long-term sickness

Recreation and Heritage

5.26 Total growth proposals are £0.7m which include a £370,000 shortfall in income anticipated through closure of libraries for refurbishment (although longer-term income should increase as the result of the improvements) and £0.3m for ICT development and the Peoples Network running costs.

Social Care

5.27 The Cabinet asked Social Care to exemplify three options based on a base budget increase only (3.8%), a full passported FSS cash increase (6.5%), or midway between the two (5.2%). Additional pressures identified were more than the lower two options and the Leader has agreed that the cash limit for 2005/06 should be based on the full passported sum plus additional specific grants.

5.28 The full FSS passported increase is £13.5m and the increase in specific grants £6.3m. This is £19.8m extra in total to which a further £2.0m has been allocated from the contribution to job evaluation transitional cost reserve included in the 2004/05 budget to cover the additional market allowances for social workers and care staff approved during 2004/05. Social Care has therefore received more than the full passport and the total increase can be summarised as follows:

Table 8: Total cash increase for Social Care within 2005/06 budget guidelines

	County Council		Specific Grant		Total
	£m	%	£m	%	£m	%
Children	3.9	7.4	1.0	17.1	4.9	8.4
Adults	11.6	6.8	5.3	8.5	16.9	7.2
Total	15.5	7.0	6.3	9.1	21.8	7.4

5.29 Additional resources have also been redeployed from the efficiency savings which has led to £14.1m for available new growth as illustrated next.

Table 9: Available growth for Social Care 2005/06

	£m
Budgeted contribution to job evaluation transitional costs reserve to fund market supplements agreed during 2004/05	2.0
Full FSS passported cash increase (net of £0.9m transferred to capital financing to meet the unsupported borrowing costs from the first phase of the County Council direct investment of £20m in nursing care places)	13.5
Increase in specific grants	6.3
	21.8
Less inflation based on corporate assumptions	-7.7
Available growth within passported increase	14.1
Further growth absorbed by efficiency savings	3.2
Total available growth	17.3

5.30 In turn this available growth has been allocated as follows:

Table 10: Allocation of growth for Social Care in 2005/06

	£m
Children and Families	2.9
Older People	7.6
Adults	4.8
Management and Support	0.8
Contingency	1.2
Total	17.3

5.31 £1.9m of the extra £2.9m for children and families is required to meet continuing additional placement pressures from 2004/05. £0.3m is required for additional inflationary pressures and another £0.3m added to the CAMHS service.

5.32 £3.5m is required to meet the servicing costs of operating the new 50 extra nursing beds as they come on stream during 2005/06. Additional procurement costs require another £1.4m for older people and an extra £2.5m has been added to meet the full year costs of 2004/05 care packages (domiciliary, residential and nursing placements).

5.33 Adult services have been allocated £2.6m for extra placement pressures from 2004/05, £1.2m for additional price increases and £1m from the Supporting People pressures.

5.34 The additional allocation for management and support covers IT costs (and assumed unsupported borrowing costs pending capital receipts). The contingency has been set aside to meet the possibility of 2004/05 overspend, new pressures during 2005/06, or any shortfall on planned savings in 2005/06. Given the past record of Social Care this is not enough, and further provision in balances, or reduction in the planned growth activities is necessary.

5.35 Savings are being found to meet the reduction of £2m (5.6%) in the Supporting People grant. Again there is a risk that these savings will not be achieved. The Supporting People budget of £32.4m is met wholly by specific grant, and the reduction of £2m in specific grant is allowed for in Table 8.

5.36 Neither has it been possible to avoid cross subsidy from the adults budget as requested by Cabinet, totalling £0.7m in 2004/05 and £1m in 2005/06.

6. Efficiency savings and redeployment of resources

6.1 No cuts in services have been made but services have found a combination of cash efficiency savings and redeployment of resources to finance the additional pressures, growth and priorities identified in paragraph 5. Details are shown in Appendix 4 and are summarised in this paragraph. Total cash efficiency savings and redeployed within services are £7.6m, as shown in Table 6.

6.2 Services have not delivered any net savings to reduce council tax or to be redeployed elsewhere. However the targeted 1.25% cash savings have broadly been achieved, but not necessarily directly from staffing or procurement savings. The main problems are around achieving procurement savings in Social Care as inflation on residential and other care packages purchased in the private sector are substantially more than the corporate price inflation assumption of 2.5%.

6.3 Similarly it does not appear possible to achieve cash efficiency savings on capital procurement because of the higher inflationary pressure. It is therefore proposed to set aside the 1.25% efficiency saving on the locally resourced capital programme which would have reduced revenue contributions to capital by about £0.5m. However it is expected that in return all additional pressures on the locally resourced capital programme will be absorbed within existing cash limits or from stretched targets for capital receipts.

Staffing savings

6.4 Improved absence management is an efficiency saving but does not help reduce council tax. Staffing savings could be achieved by holding vacancies and not replacing staff who leave - over and above the current requirement to manage staff levels to absorb increments of £4.5m across all services as summarised next.

Table 11: Increments etc absorbed 2005/06

	£m
Education (including Schools)	2.6
Environment	-
Policy and Resources	0.7
Recreation and Heritage	0.3
Social Care	0.9
Total increments absorbed	4.5

6.5 It has proved very difficult for services to find additional staff efficiency savings because of the arbitrary nature of such savings without a medium-term plan to restructure, reduce overheads and improve productivity by reducing the number of staff. This will be required when the Efficiency Plan is considered in both April and June 2005 (see paragraph 6.15). Part of that plan will need to include a benefits realisation plan following the implementation of the job evaluation review and the revisions to pay and benefits.

6.6 Progress made by each service in staff savings are summarised below:

Education

No staff savings identified apart from £92,000 for frozen posts within the inclusion branch. But £420,000 from staff efficiency savings are still to be found to offset identified pressures, if the recommendation at paragraph 5.8 is accepted.

Environment

Because of past re-gradings etc Environment has a £684,000 staff savings target built into its 2005/06 base budget - 3.1% of its staffing budget. This savings requirement has been carried forward from 2004/05. Little has been identified on top of this - about £55,000.

Policy and Resources

Targeted efficiency savings of £882,000 are expected to be achieved, largely from staff savings. This includes £500,000 planned SAP savings within Policy and Resources which are mainly staff related reductions.

Recreation and Heritage

Efficiency targets across all services shown as £560,000 `reductions' across the service. About 60% could be staff related. Say £340,000.

Social Care

This is the one area where staff vacancies are budgeted for as it is necessary to replace vacancies or absences with agency or temporary care staff. A cash saving of £380,000 is projected in agency costs as a result of the higher recruitment and retention of staff possible after the introduction of additional market allowances in 2004/05. The creation of a peripatetic team to reduce agency costs will produce net savings of £400,000 after taking into account the additional staffing costs. Social Care has also identified reductions in administrative staff (£160,000), management costs (£250,000) and increased specialisation of support services (£70,000).

Agency contract savings

The full year effect of the savings from the corporate agency staffing contract estimated at £250,000 has still to be apportioned between services.

6.7 Total additional cash savings on staffing are therefore around £3.3m as set out below:

Table 12: Additional staff cash savings

6.8 This is some £3.3m on top of £4.5m additional costs from increments etc already absorbed.

Other Savings

6.9 The other main cash savings contributing to the balance of £5.1m identified (£8.4m - £3.3m) are:

Education

· Public liability insurance (£0.5m)

Environment

· term maintenance contract, efficiency savings including discount from higher turnover (£0.3m)

· transfers to/from capital (£0.75m) on highways maintenance

· review of evening and Sunday bus services (£0.5m)

· savings arising from improvements in car and scrap metal markets reducing the disposal of abandoned vehicles (£0.25m)

· various management and support services savings (£0.3m)

Policy and Resources

· savings from business rate reduction and higher capital receipts (£265,000)

· audit fee savings due to excellent status (£20,000)

Recreation and Heritage

· additional income in libraries from VAT appeal (£170,000)

· reductions in policy fund (£150,000)

Social Care

· more cost effective placement decisions (£0.7m)

· improved rigour in establishing Social Care responsibility (£0.4m)

· streamlining financial assessments procedures (£150,000)

· reduction in fines for delayed discharges (£0.2m)

· reduction in unit costs by re-providing for uneconomic services (£130,000)

· further procurement savings (£0.2m)

6.10 The total cash savings and redeployments can therefore be summarised as follows:

Table 13: Total cash efficiency and other savings

6.11 Total efficiency improvements are therefore £13.9m (£8.4m + £4.5m from increments etc + £1.0m from improved service outcomes at the same cost within the budget guidelines).

Value for money and efficiency savings

6.12 The Cabinet agreed on 27 September 2004

· value for money considerations are formally built into procurement decisions and into the annual budget setting process

· Cabinet and Executive Members should routinely and explicitly include value for money considerations in their decision making.

6.13 Cabinet will therefore wish to scrutinise the efficiency savings set out in this paragraph, and the proposals for additional growth set out in paragraph 10 in this context.

6.14 The review in September was in anticipation that the efficiency savings would feature strongly in the next Comprehensive Performance Assessment (CPA) as a consequence of the Spending Review and the Gershon Review of public service efficiency. This informed the budget guidelines in setting the 1.25% cash savings target for services.

6.15 ODPM guidance on the assumed `Efficiency Plan' was delayed and has just been released. A separate report to this Cabinet meeting outlines the requirements and work required to meet the April and June publication deadlines.

6.16 In addition the CPA guidance has been revised by the Audit Commission.

6.17 The corporate assessment will become more challenging in that it will have a more explicit consideration of management of resources and value for money when reaching judgements about capacity.

6.18 The use of resources block will be a more rigorous assessment than previously as it will include an explicit judgement on value for money; and provide the opportunity for councils to show, through their annual efficiency statement, that they are delivering the efficiency gains required under the efficiency review.

6.19 Cabinet will therefore wish to continue their focus on value for money in determining changes in priorities, redeployment of resources and in new growth items.

6.20 At its December meeting budget guidelines were set with the requirement that in order to demonstrate the importance of value for money in the budget decision making process

· Any proposals for additional spending, however financed, need to be accompanied by a summary business case containing clear financial and performance data setting out how performance will be improved and value for money achieved, linked to the key aims of the corporate strategy.

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, and the inflation allocation has been calculated on the basis that charges are increased in line with the allowance for inflation on gross expenditure, averaging 3%.

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

Table 14: Summary of income from fees and charges

	Mandatory	Discretionary	Total
	Charges	Charges
	£m	£m	£m
Education	1.9	0.9	2.8
Environment	0.2	6.8	7.0
Policy and Resources	1.1	6.7	7.8
Recreation and Heritage	-	7.6	7.6
Social Care	41.3	8.4	49.7
	44.5	30.4	74.9

8. Workforce plan

8.1 The Cabinet has agreed that the workforce plan should in future be integrated with the budget cycle.

8.2 The details of the workforce costs and proposed changes in 2005/06 are set out in Appendix 8.

9. Additional resources

9.1 New pressures, priorities and growth totalling £7.6m have been met within the budget guidelines by cash efficiency savings and redeployment of other resources, as set out in Table 6

9.2 Within the budget projections reported to Cabinet in December were the following contingency items:

· £1.2m for second homes council tax discount, subsequently increased to £1.4m as a result of two additional district councils opting to reduce discounts in 2005/06

· £0.2m for modern apprenticeships, and youth, crime and deprivation incentives in Andover

· £161,000 for civil emergency measures

9.3 During 2004/05 the income from the second homes discount was set aside to work in partnership with the relevant district councils to develop affordable housing for key workers. Progress has been slow in devising a suitable approach to agreement with the district councils but proposals were agreed by Cabinet in December. The amount attributable to Fareham was used to improve local roads and footpaths.

9.4 For 2005/06, the Leader has proposed in the main, to deploy this resource to support the growth included in last year's budget for accredited community safety officers, enabling an equivalent saving to be achieved in the 2005/06 budget.

9.5 The £200,000 for modern apprenticeships etc will be retained in the contingency subject to a value for money review of the pilot year in 2004/05 and a decision whether to continue the project in 2005/06.

9.6 The ring-fenced Civil Defence grant has been abolished and the Government's contribution to local authorities' civil protection work has been transferred to EPCS FSS and formula grant. This is purported to include a 121% increase over 2004/05, although the overall EPCS increase for the County Council is just 2.9%. The contingency included in the budget guidelines reflects the purported increase which is expected to cover the costs of: legal duties under the Civil Contingencies Act; implementing specific planning or capability requirements; and wider `pressures' on emergency planning. The extra £161,000 will be retained in the contingency pending a report on the business case and improvement in performance expected by releasing these resources during 2005/06, in conjunction with the additional resources available to district councils.

9.7 Balances at 31 March 2004 when the accounts were closed were £13m. £0.5m was transferred to Hampshire Fire and Rescue Authority on 1 April 2004 and £1.5m was budgeted to be used in 2004/05. This left £11m available in balances, £4.7m more than the targeted level of balances of £6.3m for 2005/05.

9.8 The level of minimum balances will need to be increased by £0.4m because of the higher budget in 2005/06. Reference has already been made to the higher risks in 2005/06 from increased savings targets totalling £8.4m, particularly on Social Care, which have not been achieved in the past. It would therefore be prudent to retain £2m in balances to cover those risks in 2005/06.

9.9 Savings of £2.2m in the revised budget 2004/05 (paragraph 2.19) can also be added to balances.

9.10 Taking these adjustments into account there remain `surplus' balances of £4.5m which can be allocated for one-off investment as illustrated next.

Table 15: Estimated additional balances at 31 March 2006

	Total
	£m
Balances at 31 March 2004	13.0
Less transfer to HFRA and use in 2004/05	-2.0
	11.0
Saving in revised estimates	2.2
Estimated balances at 31 March 2005	13.2
Less target level of balances at 31 March 2006	8.7
Estimated surplus balances available in 2005/06	4.5

9.11 Additional grant in the final settlement is £0.8m.

9.12 The Leader has proposed making a one-off saving of £100,000 in grants during 2004/05 and £50,000 on a continuing basis.

9.13 It has also been decided, in advance of the efficiency plan, to provide an additional targeted saving of £1m in procurement costs. This will be applied across all services, except schools.

9.14 The full £750,000 savings from the SAP benefits realisation programme were due to be recycled into funding of the capital programme. However £0.4m of the £1m additional revenue contribution to capital for 2004/05 has been retained in the base budget without any increase in the capital guideline. As a result £0.4m of the SAP savings could be used as a direct revenue saving without having to adjust the capital programme.

9.15 The cost of member's meetings has not reduced as expected and it is proposed to seek a £100,000 saving on these during 2005/06.

9.16 Taking all these adjustments into account the available resources for use on a one-off basis in 2005/06 are £4.6m, and additional recurring savings are £2.95m.

Table 16: Available resources in 2005/06 and 2006/07

	One-off	Continuing
	£'000	£'000
Council tax discount on second homes		1,400
Surplus balances	4,500
Grants panel	100	50
Procurement savings on all non-pay budgets, except schools		100
SAP savings directed to revenue		400
Cost of member's meetings		1000
Total available resources	4,600	2,950

9.17 The recurring savings (£3.0m) now proposed, take the total savings found in 2005/06 to £15.9m (£8.4m efficiency/redeployment savings, £4.5m from absorbing increments and £3.0m from the new continuing savings in
Table 16).

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

· 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 In preparing the 2005/06 budget a number of additional costs and risks have been identified which are not certain as to timing or amount, but are likely to occur, have not been contained within the cash limits set at budget guidelines for services and will therefore require reserves or balances to be set aside to cover the cost or risk when it does occur. These include

· initial and transitional costs in setting up children's services

· potential changes in Social Care funding

· the need to provide sufficient resources within the 2005/06 budget to meet the transitional and continuing costs from implementing job evaluation under the single status agreement and consequently adopting the outcome of the pay and benefits review.

10.3 It will not be necessary to continue the budgeted contribution to the grant equalisation reserve into 2005/06 and this will release resources to cover the potential costs arising from these pressures into 2006/07.

10.4 It will also be necessary to determine a benefit realisation plan towards meeting the costs of the pay and benefits review, and this is best done over a three-year period as part of the Efficiency Plan. Similarly management, overhead and support cost savings will be sought as part of the implementation of the new Children's and Adults' service departments, to release cash savings to the front line. Invest to Save pump priming may also be needed for further improvements in IT E-Government, remodelling of services (for example the creation of a contact centre), or continued investment in corporate IT training, quality assurance and business process re-design to achieve the required Efficiency Plan Savings. In all circumstances cash efficiency savings would be expected to re-pay any sums set aside under `Invest to Save'.

10.5 Given the additional costs and risks and the need to provide budget flexibility for required changes it is proposed to create a new modernisation, restructuring and efficiency plan reserve. The reserve will contain a number of contingencies which can only be released by the Leader and Cabinet on the advice of the Chief Executive and County Treasurer against business cases showing how performance will be improved, value for money achieved and where appropriate how cash efficiency or other benefit realisation savings will be achieved.

10.6 Planned contributions to this reserve are identified next:

Table 17: Contribution to modernisation, restructuring and efficiency plan reserve

10.7 This reserve is therefore expected to cover the continuing costs arising from pay and benefits, as well as the specific contingency pressures and potential liabilities identified in paragraph 10.8. The reserve is expected to be utilised fully by the end of 2006/07 when one-off investment will have been completed, and continuing spending assimilated within future service revenue budget cash limits from 2006/07 onwards.

10.8 The specific contingencies that may be required within the reserve, in addition to pay and benefits include:

· Children Act

- contingency for set-up and transitional costs

· Potential overspends in 2004/05 and 2005/06, although services will be expected to continue their normal budgetary control disciplines to remain within cash limits

· Potential new liabilities:

- new regulations on top-up arrangements for placements in residential care (choice directive)

- bed blocking fines if introduced for community hospitals

- potential reduction in health authority funding towards care packages (Section 28)

- exceeding the VAT partial exemption limit

- further grant loss from amending reports in 2004/05 and 2005/06

· Invest to Save initiatives

· Other restructuring or modernisation costs

· Efficiency plan investment or action

10.9 Despite the substantial injection of resources into the new reserve it is clear that these additional costs and risks if drawn down are likely to put severe pressure on the resources available and required to implement job evaluation and the pay and benefits review. It is anticipated that not all the costs and risks will necessarily be incurred at the same time, but if they were all required it is likely that a funding gap of perhaps £4m to £5m might emerge in 2005/06, rising to £8m to £10m in 2006/07. This reinforces the need to hold balances at a greater level than normal as set out in Table 15.

10.10 Transferring £4m of `surplus' balances to the new reserve leaves £0.5m for one-off use in 2005/06. Total available one-off resources identified are therefore £0.6m, and continuing savings £2.95m as summarised in Table 16.

10.11 The Leader has suggested the following use of the one-off resources available:

· a contribution of £250,000 is proposed to the book fund, to replace the equivalent diversion within the Libraries budget during 2005/06 likely to be required because of the need to provide new book stock for the refurbished libraries in 2004/05.

· additional consultation surveys have been commissioned as part of the short-term aim to provide more information and identify the needs of older people

· a consultation exercise is also planned on the SE Plan partly related to the short-term Cabinet priorities around transportation and affordable housing, but also to provide an opportunity for Hampshire residents to express their views on additional housing in parallel with the survey by SEERA

· it is proposed to set aside £250,000 to cover both these surveys, of which an estimated £200,000 will be spent in 2004/05

· finally it is proposed to set aside £100,000 in a contingency to cover any travel, accommodation or other costs for staff seconded through the Local Government International Bureau to aid charitable relief efforts in Sri Lanka after the Tsunami.

10.12 Another new proposal is to provide for a Hampshire `grow your own' graduate scheme. This will provide for leadership fast-track training for existing graduates recruited throughout the Council. The aim is also to build a corporate capacity to improve graduate recruitment generally.

10.13 A further new initiative considered by the Cabinet is in connection with the short-term priority for older people. A new team is proposed to help develop the prevention agenda to reduce the anticipated growth in demand on health and Social Care services made by older people whose health has begun to fail. It is anticipated that external funding will be attracted for specific projects of benefit to older people and that the team would be supplemented by part-time secondments from Social Care. There will need to be a strategic framework within which outcomes and targets can be set, actions prioritised and performance measured. About £100,000 would enable such a team to be created, based on setting a 50% funding and secondment target for the rest of the team's costs in a full year.

10.14 Extra office accommodation leases have been necessary to assimilate increasing and changing workforce requirements despite every effort to constrain and finance these demands. About £150,000 will be needed in 2005/06 rising to £0.4m in a full year.

10.15 The success of the current initiative in 2004/05 to provide key worker and affordable housing in partnership with district councils has yet to be evaluated after a slow start. It is therefore proposed to set aside a smaller amount to continue the initiatives later in the year, after a review, following the proposed use of the council tax discount on second homes in 2005/06 towards continuing the accredited community safety officers initiative.

10.16 The next table summarises the budget additions as described in paragraph 10.

Table 18: Proposed allocation of additional resources

10.17 These allocations use up the one-off resources available in 2005/06, and leave £2.1m available (£2.95m, Table 16 minus £850,000 Table 18) towards a reduction in council tax.

11. Performance and risk 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 2005/06 for all the proposed growth and redeployment proposals set out in Appendix 4, and especially to monitor performance against specific plans for achieving all savings targets.

11.3 The process is extended to the release of the contingencies and reserves set aside in Tables 17 and 18 against business plans and targeted improvements in performance.

11.4 There remains 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.

11.5 Although a further £7.1m of formula grant has indeed been lost in 2005/06, this has been offset by the extra £7m provided by the Government to keep council tax rises to low single figures (but with no certainty of its continuation into 2006/07). This merely defers the potential grant loss.

11.6 The use of the grant reserve and the three year budget plan follow in paragraphs 13 and 15. The consideration of risks, use of reserves and balances and forward financial plans are also critical to the statement required under Section 25 of the Local Government Act which is dealt with in paragraph 18. That statement covers the other potential areas of risk that need to be taken into account in setting both the 2005/06 budget and looking forward over the next three years, particularly the uncertain changes in 2006/07 from possible further grant changes, council tax revaluation in 2007, and the introduction of fixed three year plans as described in a separate report on the agenda.

12. Balances

12.1 The variations in general balances anticipated during 2005/06 and their potential use have been identified in Tables 15 and 17.

12.2 The forecast use of balances by 31 March 2006 is set out next:

Table 19: Forecast use of balances 2005/06	£m
Estimated balances at 1 April 2005	13.2
Transfer to modernisation, restructuring and efficiency plan reserve for use in 2005/06 and 2006/07 and for use for one-off investment in 2005/06	-4.5
Additional balances against higher risks in 2005/06	-2.0
Long-term estimated balances	6.7

13. Earmarked reserves

13.1 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.

13.2 Total earmarked reserves were £66.5m at 1 April 2004 and were expected to reduce to £56.8m at 1 April 2005. The current projection is for total reserves of £67.5m at 1 April 2005.

13.3 The difference is mainly due to the increase in the general capital reserve of nearly £12m because of slippage in capital payments and use of other available financing resources first. The capital reserve will be fully utilised to finance capital payments over the next three year period of the capital programme.

13.4 Overall earmarked reserves are projected to remain at around £67m by 31 March 2006. The main components are:

Table 20: Earmarked reserves at 31 March 2006

13.5 The schools reserve represents the balances on schools delegated budgets which are ring-fenced and carried forward for use in future years. They are budgeted to decline from £28.3m at 1 April 2004 to £19.4m by 31 March 2006. However £5.1m of the reduction is the result of the introduction of the school balances loan scheme, which provides for the temporary use of up to 25% of school reserves to support the Education capital programme.

13.6 Apart from the creation of the new modernisation reserve (paragraph 10.5), the other main reserve is that for grant equalisation. The reserve was £13m at 1 April 2004 and will be £20.9m at 1 April 2005. It is planned to make no further budgeted contribution to the reserve so that it is used up by 2008/09. The reserve will be used proportionately to grant loss anticipated over the next four financial years. £5.9m will be drawn down in 2005/06 reducing the balance at 31 March 2006 to £15m. Current predictions are that £7.7m will be withdrawn in 2006/07 and £4.7m in 2007/08. It covers the expected loss from the Education floor and the one-off additional grant support in 2005/06. The impact on the budget requirement and council tax gradually declines as it can only be used once, but the reserve was created to smooth and taper council tax rises that would otherwise have been necessary. Without the use of the reserve in 2005/06 the council tax rise would have been 5% not 3.5%.

14. 2005/06 budget

14.1 Taking all these changes into account the final budget proposals for 2005/06 can be summarised. Additional resources held in contingencies/reserves will be allocated to services against the required business plans during the year. The resultant cash limits for each service are:

14.2 Other budgets compared with 2004/05 can be summarised as follows:

14.3 The £6.1m contingency for 2005/06 includes the following:

14.4 Bringing all these budgets together, results in an overall budget requirement of £1,107.9m.

14.5 The 2005/06 budget requirement is £49.8m or 4.7% higher than the 2004/05 adjusted budget. The reasons for the increases can be seen in Tables 21 to 23.

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

14.7 It is anticipated that the overall council tax bill for 2005/06 will increase by about 3.5%, as follows (assuming an average district council tax increase of say 3%)

Table 26: Provisional council tax bill 2005/06
	2004/05 Band D	2005/06 Band D	Increase
	£	£	%
Hampshire County Council	840.15	869.40	3.5
Hampshire Police Authority	108.36	114.30	5.5
Hampshire Fire and Rescue Authority	51.30	52.11	1.6
Average District	148.46	153.07	3.0
Average Band D in Hampshire	1,148.27	1,188.88	3.5

14.8 The overall budget can be compared with FSS blocks as set out in Table 27. 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.

14.9 The 2005/06 budget is £40m (3.7%) over FSS compared with 4.4% above FSS in 2004/05. The excess is equivalent to 10% on the council tax.

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

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

Table 28: 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	10.6
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
2005/06	5.3	5.0	4.7	3.5

14.12 The 2005/06 council tax rise is the lowest local tax rise since 1974/75 apart from 1984/85 when domestic rates increased by 3.5%.

14.13 The reasons for the increase in the council tax rise are set out next:

Table 29: Explanation of council tax increase

14.14 The council tax rise projected in December was 4.6%. The main reasons for the change since then are set out next:

Table 30: Changes to council tax projection

14.15 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. Three year budget plan

15.1 The purpose of the three year budget is to

· provide a medium-term financial plan framework for the development of service plans

· identify risks and uncertainties which need to be taken into account in agreeing the level of reserves and balances for the 2005/06 budget

· draw Cabinet's attention to any major issues in advance of the 2006/07 budget and which may affect future public consultation

· set a basis for the required prudential indicators (Appendix 12) for 2006/07 and 2007/08

15.2 Appendix 9 assesses the likely budget and council tax rises for 2006/07 and 2007/08 to complete the three year budget plan. The Appendix explains the assumptions behind the figures for future years. The next table shows the possible results, but the projection depends very much upon the assumptions made on Government grant changes as a result of the new specific grant for schools funding.

Table 31: Forward budget plan
	2005/06	2006/07	2007/08
	%	%	%
FSS	5.3	4.0	3.8
Budget	4.7	4.0	4.6
Grant	5.0	-6.8	-0.9
Council tax	3.5	6.7	5.3

15.3 The summary of projected FSS, budget, council tax and grant increases from 2006/07 shows the uncertainty around the change in funding schools by specific grant. If the Government retains the assumptions about council tax increases contained in the spending review, makes no changes in the distribution of grant between local education authorities and other local authorities, then it is projected that the County Council's share of revenue support grant will reduce in 2006/07 and again in 2007/08. This is because the Government will have to support the increase in the schools' budget in 2006/07 and 2007/08 wholly from specific grant, and to do so within existing spending plans, will need to divert part of the planned increase in RSG.

15.4 The County Council's balance of funding will also change as below:

	2005/06	2006/07
	%	%
Grant	60	20
Council tax	40	80

15.5 However every extra 1% on council tax will still cost £4m.

15.6 The exclusion of schools funding will also reduce future percentage increases in FSS for the Council's remaining services. This is amplified by a lower planned rate of growth in public spending after 2005/06. This particularly affects highways maintenance and Social Care.

15.7 Highway maintenance is frozen at its 2005/06 cash level for the next two years.

15.8 Planned increases for Adult services fall to 4% in 2006/07 and Children's services to 4.6% in 2007/08. This is compounded by the withdrawal of one-off specific grants for Social Care in 2005/06. As spending pressures are likely to follow current demographic and other trends this will mean efficiency savings or other reductions will be needed; or council tax rises will continue to inflate.

15.9 This shows the importance of the Efficiency Plan. The greater pressures that lie ahead in 2006/07 show the need to concentrate further on value for money, performance improvement and a medium-term plan for efficiency savings.

Financial planning framework

15.10 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 2006/07 and 2007/08.

Budget Consultation

15.11 The Cabinet in December decided that in view of the delay in setting firm budget guidelines because of the late grant settlement, not to proceed with holding a community workshop and telephone survey in January based on more specific proposals, but to consider what, if any, further budget consultation is required.

15.12 As a result of the lowest ever council tax rise, no further consultation has been necessary, but Cabinet may wish to present a summary of the outcome to the various groups consulted and thank them for their input.

15.13 Further consultation on the forward plan with these groups is suggested before the development of the detailed budget strategy for 2006/07 because of the more difficult outlook again in that year.

Past trends

15.14 As well as looking forward, it is possible to update the past trends in FSS, grant, budget and council tax and these will be available later.

16. Treasury Management Strategy and Investment Strategy

16.1 The County Council is required to adopt a treasury management strategy and an annual investment strategy for 2005/06 and these are set out in Appendix 11 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 and the investment strategy for submission to the County Council for approval, conforming with the prudential code for capital finance.

17. Prudential indicators

17.1 The Cabinet agreed a policy on the use of unsupported borrowing in November 2003. 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.

17.2 Appendix 12 contains the prudential indicators required by the code for the County Council. The summary of prudential indicators in the Annex to Appendix 12 will be submitted for approval by the full Council in setting the budget.

18. Section 25 report, Local Government Act 2003

18.1 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

18.2 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. The full report is set out in Appendix 13.

18.3 The level of balances and reserves has been recommended taking into account greater risks and uncertainty in the 2005/06 budget and ensuring sustainability into 2006/07. The estimates, balances and reserves should be robust enough if the County Council accepts the budget recommendations.

18.4 Problems are again deferred into 2006/07

· one-off grant support in 2005/06

· higher council tax rise starting point

· requirement to achieve cash efficiency savings

· further grant losses from end of formula change moratorium

· impact of changes in Education funding on remaining services and grant

· council tax revaluation

· outcome of Lyons enquiry into council tax

Recommendations

1 The recommendations are set out in the decision sheet summary which proceeds 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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