Archived decisions

Hampshire County Council Item 8

23 February 2005

Revenue Budget and Precept 2005/06 and Capital Programme 2005/06 - 2008/09

Report of the Cabinet

A. REVENUE BUDGET AND PRECEPT 2005/06

1. Summary

1.1 The Cabinet recommends a council tax increase of 3.5%, the lowest tax rise since the 1974/75 reorganisation except for 1984/85 which was also 3.5%. This low level of increase has been achieved by using cash efficiency savings and the redeployment of other resources to meet all new service pressures and demands. There was an increase in the Council tax base and a data adjustment in the final grant settlement which also helped to reduce the projected Council tax rise of 4.6% in December 2004. Budget guidelines were set in December after the Government's announcement in the provisional settlement of one-off extra grant to reduce council tax rises below 5%. The Government has also given limited additional funding in the final grant settlement to keep council taxes low. The budget and council tax increases therefore meet the statements of the Minister for Local Government that:

- "the Government expects all local authorities to budget prudently"

- "the average council tax increase in England will be less than 5%"

- "all authorities must deliver efficiency gains"

The Government has also made it clear that capping powers would be used to protect against excessive budgets. The proposed budget therefore avoids the risk of capping as well as delivering substantial efficiency gains and savings totalling £15.9m.

1.2 In summary the recommended budget proposes:-

- a budget of £1,107.9m which is £49.8m more than the 2004/05 budget.

- a council tax of £869.40 for a Band D property

- spending which is £39.9m or 3.7% above Formula Spending Share compared with 4.4% in 2004/05.

1.3 There are no cuts in the proposed budget yet the budget strategy provides for the lowest possible council tax rise; this is in line with the clearly expressed wishes of the various representative groups during the budget consultation process.

1.4 In September 2004 the Cabinet agreed that value for money considerations should be built into procurement decisions and into the annual budget setting process, and that Cabinet and Executive Members should routinely and explicitly include value for money considerations into their decision making. In addition, attention has been given to the identification of efficiency savings for 2005/06. Both value for money and efficiency savings will be a key component of the next Comprehensive Performance Assessment which will become more challenging. The use of resources block will take the form of a more rigorous assessment than previously and will provide an opportunity for councils to demonstrate that they are delivering efficiency gains via their annual efficiency statement. The Cabinet will therefore continue to focus on value for money in determining changes in priorities, redeployment of resources, and in new growth items as well as the preparation of an Efficiency Plan for the required April and June publication deadlines.

2. Budget Guidelines

2.1 As requested by Cabinet, Executive Members have put forward service budgets in accordance with an agreed budget strategy.

3. Budget Proposals

3.1 Following a review of Executive Members' specific proposals, the Cabinet proposes total planned expenditure of £1,107,865,000.

3.2 In respect of Education, there will be a full passporting of the schools budget (£26.4m) to meet the secondary and special school minimum funding guarantee of a 4% per pupil increase, and a 5% per pupil increase for each primary and nursery school. New growth for schools of £3.8m is available; £2.9m will be used to cover secondary exams, additional non-teaching support staff, business rates revaluation and special education needs; £0.9m to central spending for a new early years centre, special education needs and education other than at school. In addition to the passported cash increase, schools also have an increase to specific grants resulting in a total increase of £30.8m.

3.3 The total proposed budget increase for Social Care is £21.8m made up of a full passported increase of £13.5m, an increase in specific grants of £6.3m and an additional £2.0m funded from the contribution to job evaluation transitional cost reserve included in the 2004/05 budget, to cover additional market allowances for social workers and care staff. Additional resources have also been redeployed from efficiency savings making £17.3m available for new growth. Pressures within the service are continuing especially in respect of placements for both children and families and adult services. A contingency has been set aside to meet the possibility of an overspend during 2004/05, new pressures during 2005/06 or any shortfall on planned savings in 2005/06.

3.4 In respect of Policy and Resources, pressures totalling £0.9m have been met using the central allocation of the passported increase for Social Care, by redeployment of the targeted efficiency savings (other than SAP benefit realisation savings) and by a proposed continuation of Invest-to-Save funding.

3.5 For Environment, pressures of just under £2m above the base budget have been identified to be met from efficiency savings and other redeployed resources, namely £1.1m on highways maintenance (additional inflationary costs including street lighting energy contracts, and for the development of an asset management approach to highways maintenance); bus contract re-tendering and commercial service de-registration costs; staff and information technology costs in management and support services.

3.6 The total growth proposals for Recreation and Heritage are £0.7m, also to be financed by the redeployment of savings. This figure includes an anticipated shortfall in income of £370,000 due to the closure of libraries for refurbishment (longer term income should increase as a result of the improvements), and £0.3m for ICT development and the Peoples Network running costs.

3.7 Services have in total identified efficiency and other savings of £7.6m which are being redeployed to fund their service pressures.

3.8 In addition extra resources of £4.6m on a one-off basis, and £2.95m on a continuing basis are available as described below:

Table 1

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

A number of additional costs and risks including initial and transitional costs in setting up children's and adult services, potential changes in Social Care funding and potential costs arising from the outcome of the pay and benefits review have been identified and these, coupled with the need to provide budget flexibility for required changes and the Efficiency Plan, have prompted the Cabinet to propose the creation of 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 robust business cases. Planned contributions to this reserve are as follows:-

Table 2

	2005/06	2006/07
	£'000	£'000
Use of identified `surplus' balances	4.0
Budgeted contribution to reserve	8.7	8.7
	12.7	8.7

After the transfer of the £4m of surplus balances shown above, there remains £0.5m plus the £100,000 savings in Leader's grants (referred to in Table 1) making a total of one-off resources of £0.6m for use in 2005/06. The suggested use of these resources is outlined in Table 3 below; the table also shows how it is proposed to utilise £850,000 of the £2.95m identified in Table 1 for continuing initiatives:-

Table 3

	2005/06 only	2005/06 continuing
	£'000	£'000
Book fund (new book stock for refurbished libraries)	250
Older people and South East plan surveys to identify needs (each estimated at £130,000)	250
Contribution to expenses of Tsunami relief team	100
Education pressures including £76,000 ring fenced for after school transport		200
Hampshire `grow your own' graduate scheme		200
Older people, prevention agenda team (50% funded)		100
Office accommodation leases (£0.4m full year)		150
Affordable key worker housing		200
	600	850

4. Performance and Risk Management

4.1 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 each proposal would be implemented. All Executive Members are required to review their plans and monitor achievement against them during 2005/06 for all proposed growth and redeployment proposals. Particular emphasis is given to the monitoring of performance against specific plans for achieving all savings targets.

4.2 In respect of risk management, the principal area continues to be the uncertainty of future grant loss. The budget contains detailed plans for the use of the grant equalisation reserve, which was set up in 2003/04 to offset the anticipated loss. Although a further £7.1m of formula grant has been lost in 2005/06, this has been offset by additional Government funding of £7m to keep Council tax rises low, albeit with no certainty of continued funding into 2006/07. This has had the effect of merely deferring the potential grant loss. Attention is also drawn to uncertainty in 2006/07 from possible further grant changes, council tax revaluation in 2007 and the proposed introduction of fixed three year revenue and capital settlements.

5. Balances

5.1 Projected long term balances are £6.7m, the normal minimum prudent level of 0.6% of the budget.

6. Earmarked Reserves

6.1 Earmarked reserves at 31 March 2006 are estimated at £67m, a similar level to the current estimated balance at 1 April 2005 of £67.5m. The level of reserves at 1 April 2005 had been expected to reduce to £56.8m, however the position has changed because of an increase in the general capital reserve of nearly £12m due to 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.

6.2 The principal reserves estimated at 1 April 2006 are the schools reserve (£19.4m), the newly created modernisation, restructuring and efficiency plan reserve (£12.7m) (detailed earlier in the report) and the grant equalisation reserve (£15m). The grant equalisation reserve will be used proportionately over the next four financial years to offset anticipated loss of grant. As it is planned to make no further budgeted contribution to this reserve, it is forecast that it will be used up by 2008/09.

7. Treasury Management

7.1 For 2005/06, the Cabinet recommends that long and short term interest rates be closely monitored. Long term fixed rate borrowing should be considered if long term rates stand at 5% or below, or at a higher rate if clear signs of a rising trend in rates occur. Using the same trigger rates, lender's option/borrower's options loans can be considered in order to generate short term savings in interest costs. Guideline targets of up to £24m and £45m are proposed for 2005/06 for long term fixed rate borrowing and lender's option/borrower's options loans, which can be exceeded if the circumstances are appropriate. The Cabinet also recommends the approval of the annual investment strategy and the revised treasury policy statement.

8. Consultations

8.1 A series of consultations were carried out in Autumn 2004 with various interest groups. The key message from these was that existing service levels should be maintained but with the minimum possible increase in council taxes. Due to the extreme lateness of the announcement of the grant settlement for 2005/06, Cabinet decided not to proceed with a projected community workshop and telephone survey in January based on more specific proposals. At that time the Cabinet did decide to examine in the future what further consultation was necessary; in the event as this was the lowest ever council tax rise proposed further consultations were deemed unnecessary. However, consultations on the forward plan with these groups will take place before the development of the detailed budget strategy for 2006/07.

9. Section 25 Report, Local Government Act 2003

9.1 The Local Government Act 2003 comprises a series of duties and powers that give statutory support to important aspects of good financial practice. 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 and the adequacy of the financial reserves in the budget. The County Treasurer's report on this matter is set out in detail in Appendix 1, but in summary it is suggested that provided the County Council considers the detailed practice outlined and accepts the budget recommendations, including the level of earmarked reserves, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.

10. Conclusion

10.1 The budget for 2005/06 provides the lowest possible council tax rise with no cuts in services and with improvement met by cash efficiency savings, redeployment of other existing resources and the use of growth within the passported cash increases for schools and Social Care. As Members will be aware the County Council has retained its "excellent" Comprehensive Performance Assessment status for the third year running and the proposed budget will enable the County Council to maintain this level of service despite receiving the fifth lowest grant increase amongst counties.

RECOMMENDATIONS

(i) That the Treasurer's report under Section 25 of the Local Government Act 2003 be taken into account when the Council determines its budget and precept for 2005/06 (Appendix 1).

(ii) That the revenue budget for 2005/06 (as set out in the draft budget book circulated with the Council's agenda) be approved.

(iii) That the total budget requirement for the general expenses of the County Council for the year beginning 1 April 2005 be £1,107,865,000.

(iv) That the County Council's basic council tax for the year beginning 1 April 2005 be £869.40.

(v) That the County Council's council tax for the year beginning 1 April 2005 for properties in each tax band be:

Band A 579.60

Band B 676.20

Band C 772.80

Band D 869.40

Band E 1062.60

Band F 1255.80

Band G 1449.00

Band H 1738.80

(vi) That precepts be issued totalling £420,453,637.76 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the County Council, in proportion to the tax base of each billing authority's area as determined by them and as 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

Rushmoor Borough Council 29,701.43

Test Valley Borough Council 44,324.00

Winchester City Council 45,677.95

(vii) That the revised Treasury Management Policy Statement (Appendix 2) be approved.

(viii) That the Annual Investment Strategy (Appendix 3) be approved.

(ix) That the Prudential Indicators (Appendix 4) be approved.

B. CAPITAL PROGRAMME 2005/06 - 2008/09

1. The Cabinet has considered proposals put forward by Executive Members for the four years 2005/06 to 2008/09. The resultant draft capital programme has been circulated with the Council's agenda. In drawing up their preferred programmes, Executive Members were requested to:

- prepare proposals for a locally resourced four-year capital programme within the current programme limits, adjusted for inflation;

- submit, in addition, capital schemes supported by Government grants and supported borrowing allocations for 2005/06 and those expected to be supported in 2006/07, 2007/08 and 2008/09;

- submit proposals for the use of unsupported borrowing in accordance with the County Council's policy on prudential borrowing; and

- submit proposals for possible private finance initiative (PFI) projects which might attract support from Government.

2. Further to the budget guidelines agreed by Cabinet in December 2004, some adjustments have been made as follows:-

- continuation in 2005/06 for a further year of the £3.678m addition made to Environment's structural maintenance provision in 2004/05 and originally in 2003/04 for one year only;

- virement to revenue by Environment of £0.238m per annum from 2005/06 from the structural maintenance provision, in accordance with the special budgetary arrangements for winter highway maintenance;

- continuation in 2005/06 of the one-off addition to schools' capital repairs in 2004/05, increasing the programme by £0.754m, to provide some flexibility in the capital programme (to be funded from within the current level of revenue contributions to capital chargeable to the schools block); and

- revised phasing of the capital repairs programme to permit expenditure of £16m in 2004/05, £11.8m in 2005/06 and up to £19.9m in 2006/07, following a review by the Buildings, Land and Procurement Panel.

3. The total starts value of the four year programme is (round figures) £517m. The main elements are £356m for schemes supported by Government approvals, £156m for locally resourced programmes and £5.3m for land acquisition.

4. The proposed Education programme for the next four years totals £197.5m which includes £6.8m carried forward from 2004/05, Government-supported borrowing approvals for the New Deal for Schools (NDS) Modernisation of £42.2m and a further £81.4m by way of capital allocations direct to schools. The Government's Building Schools for the Future programme commences in 2005/06 and it has been indicated that the County Council will be included in the programme during the period 2008-2011. In the meantime, NDS Modernisation allocations will continue to be received. The Targeted Capital Fund allocations from Government totals £8.545m which includes the £5m originally allocated in 2003/04 for the reorganisation of special education in East Hampshire; the remaining £3.545m being allocated for the replacement of Sundridge Special School in Havant. The Government support for overall capital investment in Education for 2005/06 exceeds £52m including the allocations for condition and is a little lower that the £55m allocated for 2004/05. Proposals using unsupported borrowing in advance of capital receipts to progress two capital schemes have been put forward. The first scheme is for the new Chiltern Primary School in Basingstoke, formed by the amalgamation of Worting infant and junior schools which will be funded from the sales of the former Worting infant school. The second scheme is for the provision of sports facilities at Crestwood Community School in Eastleigh which will be funded from the sale of excess site area and from school contributions. Notification has been received that eight schools have been awarded specialist status thus attracting Government capital allocations of £0.1m each. As a result, it is proposed that £0.8m be added to the Education capital programme for 2004/05. Further to the Cabinet decision on 13 December 2004 to rebuild Pinewood Infants School in Farnborough as a 90 place infant school, proposals to amend the capital programme will be brought forward when the funding of the rebuilding scheme has been agreed. There will continue to be a funding shortfall within the overall Education capital programme, however this has been substantially reduced to £1.3m, mainly through the flexible management of Government allocations and also by use of the School Balances Loan Scheme and unsupported borrowing against anticipated capital receipts.

5. With regard to Environment, the Government's local transport capital settlement for 2005/06 includes an allocation of supported borrowing approvals of £27.5m, a 12% reduction compared with the equivalent figure for 2004/05, and reflects the 13% reduction nationally. The total proposed four year programme is £111.1m, with an additional £6.6m allocated for the A3 Corridor Bus Priority Scheme for 2005/06. It is proposed that several capital schemes should be controlled on an `accrued expenditure' basis instead of the usual starts basis, including the provision of Safer Routes to School schemes. The Government is continuing to work with the County Council on revised proposals for the South Hampshire Rapid Transit (SHRT) project and if a suitable proposal is developed, approval for the reintroduction of the scheme to the capital programme will be sought. In regard to other major transport schemes, separate provision has not been made in the proposed four-year programme. Instead, it is proposed that the Totton Town Centre scheme will be carried out in stages and preparatory work will continue on the Chickenhall Lane link road in Eastleigh and on the Stubbington and Botley Bypasses, with the costs being funded from the LTP allocations. The provision for locally resourced structural maintenance, as in 2003/04 and 2004/05, continues to be increased (an additional £3.678m above Cabinet guidelines) which is targeted at improving footways and highways, preventing further deterioration and reducing the maintenance backlog. To continue the good work being done to improve the environment in villages, separate provision has been made for the Hampshire Villages Initiative in addition to the Older Urban Areas programme and the Country Towns Initiative. £1m per annum has also been included to continue the improvement of household waste recycling centres.

6. The allocation of the Policy and Resources capital programme between schemes is broadly similar to the existing programme. The maintenance of the core buildings in the County Council's estate, through the capital repairs programme, continues to be the main corporate priority. The key areas of the programme are: £14m for the provision of infrastructure for development land at North Popley; Government supported New Deal for Schools allocations of £14m in 2005/06, £12.3m in 2006/07 and £12.8m in 2007/08 and 2008/09, and the annual provision of £0.9m for advance and advantageous purchases of land. Attention is also drawn to a proposed purchase of land at the Mount Hospital, Bishopstoke. An initial 10% payment will be met from the provision in the 2004/05 programme for advance and advantageous land purchases with the balance of the purchase price, plus holding costs, to be funded by way of unsupported borrowing which is to be repaid in due course from capital receipts from the development of the combined site.

7. With regard to Recreation and Heritage, the proposed capital programme for 2005/06 includes the £7.3m scheme for the Winchester Cultural Centre added to the programme in 2004/05. The revenue running costs of the Cultural Centre will be closely monitored and there will be a requirement for any actual increase in revenue costs to be met within the service's existing revenue budget. Increased allocations were included in the 2004/05 programme for countryside and rights of way improvements as well as works relating to Health and Safety legislation and the Disability Discrimination Act in Recreation and Heritage premises, community buildings and village halls. Although it is not possible to maintain these increased levels of investment in 2005/06 and beyond, a bigger programme can be supported during 2005/06 from additional property disposals, subject to the approval of the Executive Member for Policy and Resources and an allocation has been added to the proposed programme.

8. The capital programme for Social Care is in line with guidelines, however a proposal for the possible use of unsupported borrowing in advance of capital receipts to fund a matching contribution from Social Care of £375,000 for a replacement day centre for older people in the Hythe and Dibden area has been put forward. This is in addition to the proposed further use of unsupported borrowing in respect of a £1.7m shortfall for the SWIFT Social Care IT system and other e-government development work. Social Care already have commitments to find resources to support previous capital schemes, therefore it is suggested that a further report on the proposed programme be submitted to Cabinet to consider the overall use of future capital receipts made available to Social Care to cover: a £1.32m contribution towards the cost of improvements already made to residential homes for older people; £375,000 for the replacement day centre for older people in the Hythe and Dibden area, and £1.7m for the shortfall on the SWIFT project. It is suggested that the requests to use unsupported borrowing be deferred as the sites that will be sold to meet these commitments have not yet been fully identified. Schemes supported by Government grant to improve information management (£386,000 in both 2005/06 and 2006/07) and for IT to support integrated children's services (£230,000 in 2005/06) have been added to the programme. The ENHANCE project to provide 500 new beds to maintain capacity in the nursing care home market continues to make good progress with £40m having been contributed by the Department of Health and the Strategic Health Authority, the remaining £20m being funded by the use of unsupported borrowing under the Prudential Code.

9. In respect of the private finance initiative (PFI), no specific schemes have been identified by Executive Members for the proposed four-year programme. However, it is possible that the revised proposals for SHRT currently being worked on, as mentioned earlier in this report, could include a significant PFI element. Further consideration is being given to the opportunity for making a PFI bid for funding some street lighting replacement works in 2005/06. If such a bid is proposed, the Executive Member for Environment will report to Cabinet in due course.

10. Payments and resources will continue to be closely monitored throughout 2005/06, with progress reports being submitted at regular intervals to the Leader and Cabinet indicating any action that is required. Similarly, Executive Members will also review progress of their individual capital programmes during the course of the year.

RECOMMENDATIONS

(i) That £1.85m be added to the Education capital programme for 2004/05 to provide a new Chiltern Primary School in Basingstoke.

(ii) That additional unsupported borrowing of £1.805m be used in 2005/06 and 2006/07 to finance most of the cost of the new Chiltern Primary School, to be repaid from the sale of the former Worting infant school site.

(iii) That additional unsupported borrowing of £2.857m be used in 2005/06 and 2006/07 to finance part of the cost of the scheme to provide sports facilities at Crestwood Community School, Eastleigh, which is included in the proposed capital programme for Education for 2005/06, to be repaid from the sale of excess site area at the school.

(iv) That £4.9m be added to the Policy and Resources capital programme for 2004/05 for the purchase of a site at the Mount Hospital, Bishopstoke and to cover holding costs prior to its disposal for redevelopment, subject to the Executive Member for Policy and Resources approving the purchase.

(v) That additional unsupported borrowing of £4.45m be used in 2005/06 and 2006/07 to finance part of the cost of the Mount Hospital site, with the initial payment of £0.45m being met from the provision in the 2004/05 capital programme for advance and advantageous land purchases.

(vi) That the Executive Member for Social Care be asked to report to a future meeting of Cabinet on the proposed programme for Social Care including the overall use of future capital receipts made available to Social Care to cover:

- £1.32m for Social Services' contribution towards the cost of the
improvements already made to residential homes for older people;

- £375,000 for the replacement day centre for older people in the Hythe and Dibden area;

- £1.7m for the shortfall on the SWIFT social care IT systems

(vii) That the requests from the Executive Member for Social Care to use unsupported borrowing be deferred pending the report referred to in recommendation (vi).

(viii) That the Cabinet be authorised to determine any further use of unsupported
borrowing within the County Council's agreed prudential framework for capital
finance.

(ix) That the capital programme for 2005/06 be approved as set out in the draft capital programme and subject to the conditions set out in section B.3 of the County Council's Financial Procedures and, where appropriate, to the approval of the Executive Member for Policy and Resources to the proposed re-use of capital receipts.

(x) That the capital programmes for 2006/07 to 2008/09 be approved as set out in the draft capital programme for the purpose of undertaking design work (including the preparation of feasibility and design project appraisals).

(xi) That expenditure on preliminary design and planning work for major transport schemes be permitted when they have achieved a place in the County Council's Local Transport Plan, subject to the cost being met within existing Government allocations.

(xii) That authority be given to incur expenditure on land purchases as follows:

(a) up to the sum specified in respect of sites still required for the schemes included in the capital programme for the period 2005/06 to 2008/09 provided that the relevant scheme has been the subject of a feasibility or design project appraisal approved by the relevant Executive Member; and

(b) up to the amount included in the 2005/06 programme in respect of advance and advantageous land purchases.

T. K. THORNBER, C.B.E.,

Leader.

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, it based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

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

TITLE

Letters from Government departments on the capital allocations for 2005/06 and subsequent years.

Appendix 1

Section 25 report, Local Government Act 2003

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

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 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.

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

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.

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.

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

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

Appendix 2

Revised Treasury Management Policy Statement

Policies and objectives

The Council defines its treasury management activities as:

· The management of the Council's cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.

The Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the Council.

The Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving best value in treasury management, and to employing suitable performance measurement techniques, within the context of effective risk management.

Responsibilities

The responsible committee for most treasury management matters will be the County Council's Cabinet. It will consider all reports submitted by the County Treasurer and have specific responsibility for:

· Approving an annual borrowing strategy at its annual budget meeting; this strategy will cover the raising of capital finance and the management of the Council's long-term debt portfolio, and will focus on the minimisation of risk.

· Considering at the same time the County Council's Annual Investment Strategy, and making recommendations accordingly to the County Council.

· Considering and approving the annual report by the County Treasurer on the exercise of the borrowing and investment powers delegated to him.

· The policy on the appointment of external managers or contractors for the management of the treasury function.

The full County Council will be ultimately responsible for the consideration and approval of its Annual Investment Strategy, and will receive recommendations accordingly from the Cabinet.

The Cabinet will delegate authority to the County Treasurer for the determination of operating parameters, monitoring procedures and reporting arrangements for all treasury management matters. In particular, the County Treasurer will have delegated responsibility for:

· The formulation of borrowing and investment strategies for the approval of the Cabinet and County Council respectively.

· The day to day management of the Council's bank balances.

· The determination of approved methods of raising capital finance.

· The determination of criteria for, and the maintenance and monitoring of, an approved list of organisations to which the Council can lend. Limits are to be maintained on investments outstanding at any one time with organisations on the approved list.

· The formulation and maintenance of treasury management practice notes (TMPs), as recommended in CIPFA's Code of Practice for Treasury Management in the Public Services.

Appendix 3 Investment of surplus funds - Annual Investment Strategy

This proposed Annual Investment Strategy has been prepared in accordance with guidance issued under section 15(1)(a) of the Local Government Act 2003.

When investing its surplus funds, the County Council's policy is to continue to treat security and liquidity as paramount. Accordingly, only `specified investments' will be used in 2005/06. These categories of investment are defined in the Government's guidance as offering both high security and liquidity.

In particular, the Council's surplus funds will either be invested in:

· fixed-term deposits for periods of up to three months with local authorities, the Government's Debt Management Office, or banks rated at least AA3 by Moody's (a Government-recognised credit rating agency) that are included on the Council's lending list.

· call deposits with the Bank of Scotland (rated AA2)

· call deposits in four managed AAA-rated money market funds included on the Council's lending list.

The `call deposits' may be recalled by the County Council at any time. The Council's cashflow position will be monitored on a daily basis and adjustments made as necessary to the funds placed on call.

The Council's lending list includes the major clearing banks, four highly-rated European banks and all UK local authorities.

The lending list is reviewed monthly using Moody's ratings. Institutions will be removed immediately from the list if any doubt is cast on their credit worthiness, pending confirmation of the position by Moody's.

Limits are placed on levels of total deposits made with individual institutions.

An overall review of the lending list, including the money market funds, and the investment limits will be undertaken annually.

Changes to the lending list and the limits on investments will be subject to the approval of the County Treasurer.

Other, or `non-specified', investments will not be used.

Treasury management staff operate within detailed parameters set out in an internal code of practice, which takes account of the Code of Practice on Treasury Management and other guidance issued by the Chartered Institute of Public Finance and Accountancy. They are fully trained before participating in investment work.

Appendix 4



Summary of Prudential Indicators		2003/04	2004/05		2005/06	2006/07	2007/08
		Actual	Estimate		Estimate	Estimate	Estimate
Prudential indicators for capital expenditure
Capital expenditure	£m	155.7	203.1		191.6	163.1	127.0
Capital financing requirement	£m	448.6	505.6		547.7	571.4	586.3

Prudential indicators for affordability
Ratio of financing costs to net revenue stream	%	2.56	3.11		3.62	7.99	8.02
Incremental impact of capital programme on council tax	£	n/a	n/a		4.90	12.14	8.19

Prudential indicators for prudence
Medium-term borrowing not to exceed capital financing requirement		County Treasurer will ensure this is not breached

Prudential indicators for external debt
Actual external debt	£m	315.3		n/a	n/a	n/a	n/a
Authorised limits	£m	n/a		510.0	550.0	580.0	590.0
Operational boundaries	£m	n/a		400.0	400.0	430.0	440.0

External debt limits adjusted for transferred services
Actual external debt	£m	n/a		n/a	n/a	n/a	n/a
Authorised limits	£m	n/a		458.5	501.2	533.7	546.0
Operational boundaries	£m	n/a		348.5	351.2	383.7	396.0

Prudential indicators for Treasury Management
Adoption of CIPFA Code of Practice		Agreed by the Cabinet in February 2003
Upper limits - fixed rates	£m	n/a		230.0	260.0	300.0	340.0
Upper limits - variable rates	£m	n/a		316.0	345.0	385.0	400.0

Maturity structure of fixed-rate debt
Upper limits
Under 12 months	%	n/a		18	n/a	n/a	n/a
12 to 24 months	%	n/a		20	n/a	n/a	n/a
24 months to 5 years	%	n/a		23	n/a	n/a	n/a
5 years to 10 years	%	n/a		28	n/a	n/a	n/a
10 years and beyond	%	n/a		79	n/a	n/a	n/a
Lower limits
Under 12 months	%	n/a		0	n/a	n/a	n/a
12 to 24 months	%	n/a		3	n/a	n/a	n/a
24 months to 5 years	%	n/a		6	n/a	n/a	n/a
5 years to 10 years	%	n/a		11	n/a	n/a	n/a
10 years and beyond	%	n/a		61	n/a	n/a	n/a

Total sums invested for more than 364 days	£m	n/a		Nil	Nil	Nil	Nil

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