Archived decisions
Appendix 13
Section 25 report, Local Government Act 2003
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
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.
3. The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. This puts emphasis on the medium-term budget strategy. This is set out in Appendix 9 where the forward budget plan is put in the context of the financial management policy agreed by the County Council. A three year view has been taken in setting each year's budget especially following the grant loss from 2003/04 onwards.
4. Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 10. The most important reserves in terms of the three year view are the grant equalisation reserve (used to help match grant loss), the new modernisation, restructuring and efficiency plan reserve (used to meet the costs of job evaluation, restructuring for Children's and Adult's Services, potential liabilities in Social Care and elsewhere, Invest to Save schemes and to progress the Efficiency Plan) and the capital reserve used to smooth capital financing over the three year capital programme.
Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. However as the budget report makes clear in looking at the three year forecast, it is the greater uncertainties in 2006/07 that inform the need for reserves and balances during 2005/06. This budget report is the conclusion of a detailed process of prior consultation and consideration throughout the current year with reports to Cabinet in:
· July 2004
- capital and investment strategies
- schools funding changes for 2005/06 and 2006/07
· Sept 2004
- 2005/06 budget strategy taking account of spending review 2004
- budget consultation meetings with business, voluntary sector, local strategic partnerships, Schools Forum, and residents/council taxpayers associations
· Oct/Nov 2004
- meetings between Leader and Executive Members to review budget pressures, scope for savings, and priorities related to the three year planning cycle, corporate strategy and short-term Cabinet priorities, taking account of value for money and performance improvement
· Dec 2004
- Provisional Local Government Finance Settlement and budget guidelines for 2005/06
· Jan 2005
- consideration of budget guidelines by Policy Review Committees and Executive Members
· Feb 2005
- recommendations from the Leader and Cabinet to the full Council to take the final decisions
5. The County Council's policy on balances is to hold a minimum prudent level equivalent to 0.6% of the budget. This is relatively low but is sustainable given past experience provided that other elements of the financial management policy are maintained, particularly sound budget monitoring and budgetary control, and no supplementary estimates, so that spending variations are contained as far as possible within the year. However in 2005/06 there are greater risks because of higher savings targets, especially on Social Care. This is compounded by cuts in Supporting People grant and balances have been increased by £2m to cover these risks.
6. The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the risk management, balances and reserves paragraphs in the budget report.
7. In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework which covers these issues. The forward budget plan and reserves take into account the main risks and uncertainties, including changes in Government grant, especially the new specific grant for schools. Other uncertainties and risks include:
· Inflation
- There is more certainty in three year pay awards, 2.95% is fixed for 2005/06
- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (eg in Social Services purchase of care, in buildings repairs and maintenance and street lighting energy costs) where higher prices are likely in 2005/06 or have been experienced in 2004/05
- interest rates are not likely to rise or fall substantially and provision has been made from the current cost of borrowing of around 4.75% long-term to 5.25% by the end of March 2006
· Pay drift
- increments are not budgeted for and services will need to secure efficiency savings of £4.6m to offset these. Past trends suggest that this will be managed.
- there is a substantial potential liability from the implementation of the pay and benefits review. This consists of transitional protection costs arising from job evaluation, possible increased pay for some categories of employee from the process and the need to move closer to the Hay median of pay. A reserve has been created towards transitional costs. One-off investment has been provided to meet the costs of progressing the review. Further resource may be required over the next two budgets to implement fully the outcomes of the review and the modernisation, restructuring and efficiency plan reserve helps to cover some of the risk of extra pay costs in 2005/06 and into 2006/07
· Pensions
- expected increases in employers' contributions following the actuarial valuation at 31 March 2004 have been built into the forward plan for 2006/07 and 2007/08
· Additional spending, savings and redeployments built in to the budget
- these are subject to planned review by Executive Members, and additional amounts currently held in contingencies will only be released by the Leader against business plans which take into account value for money and both efficiency and performance improvements
· Efficiency savings
- there is a good track record covering the process of setting and achieving these savings, but the target is much higher in 2005/06 and larger balances are recommended to cover the risk of under performance
· Income
- there is an annual review to maximise income and increase income at least in line with non-pay inflation
· Achievement of budget plan
- well established and sound history of very close achievement of outturn to budgets
· Strength of financial information and reporting arrangements
- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year
- the Audit Commission has drawn the Council's attention to consider more regular capital programme monitoring reports and the reporting of final costs on capital schemes and these are now in place
· Capital programme
- capital strategy, asset management plans and the local transport plan have all been accredited with the highest scores in the comprehensive performance assessment
- the capital programme is now fully resourced and will be subject to review in June or July 2005
· Level of borrowing and outstanding debt
- fully covered in treasury management strategy and prudential indicators
- the policy on unsupported borrowing aims to contain the financing costs within the forward budget plan cash limits without an additional impact on the council tax payer
· Contingent liabilities
- the County Council self-insures, so it handles all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims.
· Statement on internal control
- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned
- the review of the effectiveness of the system of work internal financial control is informed by the work of the managers within the County Council, by internal audit and the Audit Commission in its annual management letter and other reports
- new Governance arrangements are in place with a Governance Sub Committee which will receive and review the statement on internal control
· Audit Commission
- gave an unqualified opinion on the 2003/04 accounts
· Other risks
- there are potential legal claims outstanding and other possible risks which past trends suggest can be met from balances if required. There is no known risk or liability which requires a contingency or reserve not already provided for in the budget report
- changes in function. These vary from year to year and are evident in the adjustments that have had to be made to 2004/05 budgets for comparison purposes. The main change which will affect future budgets is the creation of new Children's Services and Adult Services departments following the implementation of the Children's Act. Some contingency provision has been made for transitional and restructuring costs but there is greater risk of failures in budgetary control whilst the reorganisation proceeds
- Government has introduced retrospective grant amending reports; there is a risk of more losses in 2004/05 above £1.2m and possible further changes in 2005/06 grant
- more grant loss is projected in 2006/07 and further grant formula changes could also be made. Reserves need to be adequate to protect against potential volatility in that year
- the impact of the introduction of a new specific grant in 2006/07 for schools funding cannot be predicted accurately because of its effect on revenue support grant and the future balance of funding for the Council between council tax and grant for the remainder of its services
- possible risk from the loss of the VAT partial exemption limit, at least on a transitional basis, because of Government early years and community initiatives which involve VAT exempt supplies and could add about £4m per annum to spending