Attached appendices:

1. Calculation of base budget

2. Proposed revenue budget (green)

3. Proposed capital programme (yellow)

4. Level of Reserves 2006/07

5. Prudential Indicators

6. Treasury Management Strategy

Appendix 1

Calculation of the base budget

1 Summary of changes in the base budget

2 Full year cost of inflation to November 2005 prices

2.1 The original budget has been increased by the actual costs of inflation to November 2005. Total inflation is £538,000 for pay and prices.

3 Increments

3.1 These are the gross costs of increments less savings on turnover. The net cost for firefighters is nil and for support staff is £23,000.

4 Asset management costs

4.1 This reflects the change in the level of revenue contributions and continues the policy of funding from revenue the support vehicles need to be replaced as a result of leases ending prior to the age at which replacement would have been automatic had they been purchased. It also reflects the capital costs of the finance lease arrangements that will be entered into for the operational vehicles that will ending their operational leases during the year.

5 Full year effect of previous years growth

5.1 These reduce the budget by £1,195,000. This unusual position arises mainly as a result of the deletion of growth items from previous years (mainly 2004/05) including £600,000 contribution to balances, trainee firefighters establishment £166,000 and regionalisation costs £150,000. There were no new growth items started in 2005/06 and therefore no knock on full year effects in 2006/07.

6 Retained pay - number of incidents

6.1 The budget is currently based on 24,743 incidents. This was calculated using the agreed formula which takes the average of the last five years excluding the highest and lowest years to avoid any distortion of exceptional years.

6.2 The formula has been reviewed for 2006/07 and the average number of incidents remains at 24,743. This is due to the fact that 2004/05 is now the lowest year in the calculation and replaces 1999/00 which was previously the lowest year. No cash adjustment is therefore required.

7 Provision for future inflation

7.1 The provision for inflation from November 2005 to March 2007 has been calculated based on 3.4% for firefighters, 2.95% for support staff, 2.7% for pension payments and 2.5% for all other costs. An increase in local government employers pension contributions from 250% to 275% of employees' contributions has also been assumed.

Appendix 4

1 Level of Reserves 2006/07

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

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

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

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

2. Level of reserves required

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

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

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

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

3. Pensions fluctuations

3.1.1 In previous years the reserves needed to cover potential pensions fluctuations have been set at £650,000 to allow for the lump sum impacts of firefighters retiring (as they have the discretion to retire at variable times in many cases), and £250,000 to allow for volatility in transfer values paid and received. The new financial framework for pensions, which comes into force from 1 April 2006, should eliminate most of these risks. However, it is considered prudent to leave this factor at its historic level for the moment as employee movements before 1 April will still be the responsibility of Fire Authorities and also to check how the new arrangements work in practice, and then review as part of the 200/08 budget process.

4 Inflation risk: Pay

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

4.2 Here it is felt that a reserve equivalent to an additional 1.5% of firefighters' pay is sufficient, ie £300,000. Any unknown factors in non-uniformed pay can be dealt with by way of a provision as part of the budget setting process if necessary. This is not an issue for 2006/07 as the level of non-uniformed pay award is already known (2.95%).

5 Uninsured risks

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

6 Extremes of weather

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

7. Other inflation

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

8. Regionalisation

8.1 The increasing impact of the regional agenda leads to additional uncertainties. It is hoped that this will be sufficiently covered by the specific revenue budget provision of £150,000 made in 2005/06 and largely due to be carried forward into 2006/07, and built into the base budget thereafter. This will, however, be an area to keep under review

9 Capital Programme issues

9.1 Another significant development over the past two years has been the firming up of a more ambitious approach to capital spending with a move away from leasing vehicles and the initiation of Headquarters developments. This has led to the agreement of a Capital Programme which should balance if sufficient capital receipts can be generated. There is, however, a risk that this will not be achievable. If so, this could be dealt with in terms of pure financial risk by re-timing projects, but if members wish to guard against the service impact of any such re-timings, it would make sense to take some account of Capital Programme risk in deciding on the level of reserves. It is difficult to rationalise a formula-based approach to this, but with most years likely to feature a major scheme worth around £2m separate from the comparatively routine vehicle replacement programme, a "safety net" equivalent to 25% of this - ie £500,000 - might sensibly be built into the overall assessment. This, too, may require review in 2007/08, by when the full extent of capital commitments and offsetting capital receipts should have been considerably clarified.

10. Conclusion: level of reserves

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

10.2 This results in reserves at just over 3% of annual spend, which appears to be a somewhat lower proportion than for most other fire and rescue authorities.

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

10.4 Table 1: Summary of Factors

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

10.5 Accordingly, the budget for 2006/07 has been set on the basis of continuing to provide for a £2m level of reserves, but members may wish to note that next year's review is likely - in the absence of any new factors emerging - to reduce the recommended level somewhat .

Appendix 6

1 Treasury Management Strategy 2006/07

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

2 Capital finance and debt

2.1 Total capital expenditure in 2006/07 is estimated to be £5.6m which it is planned to finance through a combination of revenue contributions, borrowing, capital grant, capital receipts and capital reserve.

2.2 Since the Authority was established, 13 long-term fixed-rate loans totalling £5.1m have to date been taken from the Public Works Loan Board (PWLB).

3 Interest rates and borrowing strategy

3.1 The Authority borrows for two main reasons:

· To finance capital expenditure

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

3.2 The Authority borrows from two main sources:

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

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

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

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

4 Investment of surplus funds

4.1 In line with the budget proposals the Authority will aim to have re- accumulated balances of £2m by 31 March 2007. However, during the year cashflow requirements will mean that there is no scope for any direct long-term investment on the money markets. Therefore, the Authority will invest all its surplus funds with the County Council, earning interest based on the local authority seven-day notice rate.