Contact: Paul Carey-Kent, Deputy Treasurer 01962 847525

David Howells, Director of Corporate Services 02380 6440000 ext 203

1 Introduction

1.1 This report seeks to address five main questions:

· What are the spending requirements for 2006/07 onwards?

· What are the main risks faced by the Authority, and as a result of them are any changes necessary in the level of reserves and provisions?

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

· What should be the priorities for capital investment?

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

1.2 At the Authority's meeting on 7 December Members requested that a budget be presented leading to a council tax increases of 2.7%, (the level of increase in the basic state pension). Accordingly, this paper sets out a budget at this level.

1 Need to spend

1.1 Potential budget requirements can be split into three main categories: base budget (including revenue contributions to capital), unavoidable new costs and any proposed growth items.

1.2 The base budget represents the cost in 2006/07 of carrying forward the policies applied in the 2005/06 budget, updated for inflation and the full year effect of changes. The main factors in preparing this are:

· assumed pay award of 3.4% for firefighters (being the same level as 2005) and 2.95% for support staff

· assumed price inflation of 2.5% with the exception of certain heads such as mapping fees, business rates and fuel where the costs are known to be significantly higher

· expected cost of any fluctuations in the level of firefighters retiring (minimal effect expected in 2006/07)

· increases in local government pensions scheme costs resulting from the increase in employer's contributions

· financing costs of the capital programme (minimised as a result of the policy, established in this year's budget, of funding all vehicle purchases from revenue)

· reductions as a result of one-off elements being included in constructing the 2005/06 budget, principally the £600,000 increase in general reserves (a one-off £150,000 was also included for regional activities whilst the extent of involvement was evaluated: not all this budget is likely to be required in 2005/06 and it is anticipated that any underspend on this head will be requested to be carried forward into 2006/07, but it is still judged likely that a further £150,000 will be required for this and it has been built into the budget from 2007/08 onwards).

1.3 The base budget also assumes revenue contributions to capital of £640,000 in 2006/07, largely arising from the Authority's preferred policy of purchasing vehicles from cash rather than through loan. That rises to £745,000 in 2007/08 and £708,000 in 2008/09. In the long term this is an advantageous policy - markedly advantageous compared with leasing, though only marginally advantageous compared with borrowing in order to obtain vehicles. Furthermore, the ability this gives to switch to loan-based acquisition of vehicles offers some flexibility in framing budget options.

2 Pensions - existing 1992 scheme

2.1 Details of the change in financing arrangements have now been announced. The Authority will from 1 April 2006 have to finance:

· An employer's pension contribution of 21.3%

· Charges for ill-health retirements of either four times or twice pensionable pay depending on ability to take on alternative work. This is to be paid over three years with the first being payable in the year of retirement

· All injury awards and associated pensions.

3 Pensions - new 2006 scheme

3.1 The details of the scheme for new employees and retained firefighters have not been finalised however the "possible employer" rate is expected to be 14.5% and the lower 7% paid by employees.

3.2 The overall effect of both schemes is to reduce the budget by £2,383,000. Other minor changes to the base budget totalling £13,000 have been incorporated.

4 Overall the base budget decreases by £1,344,000 (-2.2%), ie an increase of £1,039,000 more than offset by a reduction of £2,383,000 to reflect the new pension arrangements

4.1 Details are set out in Appendix 1.

4.2 Unavoidable costs: these arise principally from legislative changes or requirements. There is now two significant issues:

· The need to establish full funding for the new equality and diversity team. This was met from underspendings in 2005/06, but needs to be sustained in order to meet this crucial agenda. This will cost £120,000 annually.

· Changes required as a result of a review of the Occupational Health, Safety and Welfare Unit will cost £60,000 p.a. Details of this proposal were considered by the Human Resources Committee at its meeting on 29 November 2005.

4.3 The only new growth item proposed is to roll out station-based administrative support (eight fte) to retained stations. It is intended to provide this for clusters of stations such that all retained stations are supported by 2007/08, with costs being incurred of £121,000 in 2006/07 and considered by the Human Resources Committee on 29 November.

4.4 No other optional growth items are proposed. In so far as any other requirements emerge they will be met by generating underspends or efficiencies.

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

5 Levels of Reserves

5.1 The Authority currently sets aside a reserve of £2m to deal with any unanticipated costs arising related to a range of risks. This level has been commended as good practice by the Audit Commission. Pensions is a key element in the calculation and given that the risk associated with pensions will reduce under the new funding arrangements it is possible that the level of reserves could be reduced. The most prudent approach would be to consider this for 2007/08 after the new arrangements have been introduced, though Members may wish to give this matter further consideration.

5.2 As discussed in the budget monitoring report elsewhere on the agenda, there are two budget pressures in 2005/06 which it is though appropriate should be funded from balances; the amending reports for 2004/05 and 2005/06 and the backdated employers pension contributions for retained firefighters opting to join the 2006 pension scheme. These total £434,000 and in order to ensure balances of £2m for 2006/07 this needs to be added to the budget.

5.3 Appendix 4 sets out the details behind the proposal to leave reserves at £2m for 2006/07.

5.4 The Authority may also set up reserves for expected future spending which are more specific in nature and less dependent on risks. The current levels of such provisions are:

· transitional grant reserve - for repayment of transitional funding £0.8m: It has been announced that £0.4m will have to be repaid in 2006/07 and £0.4m in 2007/08. Therefore the reserve will be used over the next two years

· capital payments reserve - provision for capital payments. This was set up in order to reduce borrowing. The balance is estimated to be £1.5m on 1 April 2006 and as set out in section 5 of this report will be fully used by 31 March 2008.

6 Proposed budget and council tax

6.1 To enable like-for-like comparisons of 2006/07 budget requirements the Government issues an "Alternative Notional Amount" which notionally adjusts the 2005/06 budget requirement for the significant changes in finance arrangements taking place in 2006/07. For Fire Authorities this is the change in financing pensions which takes out £2,388,000 for Hampshire bringing the 2005/06 budget requirement down to £57,878,000. Therefore the proposed budget represents a 3.0% increase in budget.

6.2 In order to achieve a council tax increase of 2.7% a budget reduction currently estimated to be £102,000 will be required. This could be achieved through reducing revenue contributions to capital, adjusting the level of the general reserve or by using underspends. Should the decision be made to not seek savings then the budget represents a 3.0% increase in council tax. It should be noted that the tax base and collection fund surpluses/deficits will not be finally notified until 31 January and therefore the position cannot be finalised until after this date. An oral update will be given at the meeting.

6.3 On this basis the draft budget which represents an increase in council tax of 2.7% can be summarised as:

	£'000
Base budget	58,921
Unavoidable costs	630
Growth items	121
Reinstatement of balances	434
Transitional Grant reserve	-394
Savings to be identified	-102
Total draft budget	59,610

7 Savings and efficiency measures

7.1 Members will wish to be sure that appropriate savings and efficiency measures are taken in order to:

· minimise the level of council tax;

· deliver the Gershon requirements of 5.7% cashable savings by 2007/08; and

· maximise the scope for shifting resources from `responding' towards `preventing' and `protecting' in line with the Authority's corporate aims.

7.2 There are two possible ways of achieving this:

· underspending in 2005/06 and using this as one-off support in the following year. In line with the policy established in previous years, it is intended to underspend if possible, and even though some £0.5m of underspendings have been recycled into new policy developments in 2005/06, it is hoped to achieve some further underspend which could help in 2006/07

· make efficiency savings. The annual efficiency statement for 2004/05 demonstrated that 1.3% (£717,000) cashable efficiency savings were made. With planned savings in 2005/06 of 1.22% (£709,000) this leaves a further 3.22% (£1,801,000) to be made by 2007/08. It is hoped to make these principally through implementation of the third Integrated Risk Management Plan (IRMP), on which consultation is currently taking place. It is assumed at this stage that this will meet the Gershon targets, but that any savings achieved will be diverted into additional protective work, eg more home fire safety checks, and that in terms of the budget requirement the effect will therefore be neutral.

7.3 During 2004/05 £377,000 (0.65%) of the Authority's budget) was transferred to prevention and protection, increasing to an estimated £1,207,000 (2.07%) in 2005/06 and levelling to £1,172,000 (2.01%) from 2006/07. The submitted Annual Efficiency Statements for 2004/05 and 2005/06 were appended to the draft budget report to the Authority in December 2005.

8 Government initiatives

New Dimensions Crewing

8.1 Funding of £612,000 was provided in 2005/06 for the crewing of the Urban Search and Rescue (USAR) capability under the New Dimensions programme. The announcement of the grant funding for 2006/07 and 2007/08 is expected early in 2006. A similar figure to 2005/06 has been included in the draft budget for 2006/07 and is matched by expenditure.

Fire Control New Burdens

8.2 The Authority has recently been notified that it will receive £53,000 in 2006/07 and £56,000 in 2007/08 for the net additional costs of co-ordinating control change activities from 1 April 2006 until the end of the migration period. This funding is intended to cover the additional work that is required to scope out the costs and plans for delivery of items about which there is not sufficient clarity on the required level of funding now e.g. data migration, convergence and HR related activities. Neither additional costs or grant income have yet been incorporated into the budget - these will be included when the expenditure heads have been identified.

Firelink

8.3 The ODPM envisages no net additional costs to Fire Authorities and has therefore not provided additional funding. Until more details are available no provision has been made in the budget.

9 Capital Spending

9.1 The proposed capital programme for the three years 2006/07 to 2008/09 is set out in Appendix 3. The projections include estimated capital receipts of £496,000 in 2006/07 and £2,823,000 in 2007/08.

9.2 The Government has now announced the level of supported capital expenditure for 2006/07 and 2007/08. This Authority will receive £1,524,000 for each year compared to the £1,500,000 in 2005/06.

Vehicles

9.3 The vehicles programme for 2006/07 to 2008/09 is as presented to the Finance and General Purposes Committee in October with the costs updated to 2006/07 outturn prices. As agreed for 2005/06, revenue contributions are used to cover the replacement support vehicles that were previously leased and the capital costs incurred as a result of renegotiating the leases on the operational vehicles.

Headquarters work

9.4 Members will be aware that there is existing capital provision of £3,530,000 in the current capital programme for developing the new stores and vehicle garaging; the HQ/Training Centre extension/link building; and the refurbishment of reception and other offices.

Compartment Fire Behaviour Training facilities (CFBT)

9.5 A proposal to provide additional CFBT facilities to cope with demand from both Hampshire and West Sussex firefighters is nearing finalisation. The total cost of the works is estimated at £300,000 and West Sussex CC have offered to pay £150,000 towards the capital costs. It is proposed that Hampshire's share would be financed from savings in the 2005/06 training budget of £100,000 and £50,000 from Urban Search and Rescue (USAR).

USAR practical training facilities and associated accommodation

9.6 This facility is to be funded by the ODPM but exact funding arrangements have yet to be agreed. In order to retain maximum flexibility it is suggested that this is added to the main headquarters scheme. £281,000 was identified as part of the October budget monitoring and so a further £19,000 is now required.

Capital financing

9.7 The revenue effects of the proposed capital programme do not add to the budget in 2006/07 but add £189,000 in a full year.

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

9.9 Appendix 5 summarises the indicators which the Authority needs to set on an estimated basis in approving the budget and capital programme and which will then be subject to monitoring during the year and approval at the year end. In compiling these figures it has been assumed that the capital programme will be approved as set out in this report. In summary the proposed programme can be judged to be prudent as defined by the requirements of the Code and does not fully utilize the Authority's Government supported borrowing.

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9.10 It is proposed to finance the capital programme as follows:

10 Grant settlement

10.1 The increase in government grant, against the Authority's adjusted 2005/06 grant (adjusted in the same way as the Alternative Notional Amounts (ANA) for budget requirement) is 2.6%.

10.2 Each £1m increase in spending adds £1.63 per year to the band D council tax.

10.3 The Government has reserve powers to cap authorities proposing council taxes which they consider excessive, and has indicated that council tax increases below 5% are required. The proposed budget is clearly within these guidelines.

10.4 In addition, the Government has published Amending Reports for 2004/05 and 2005/06 grant settlements. These are published when the Government discovers an error (not attributable to local authorities) in the data used in previous grant settlements. This Authority has had its grant allocation reduced for the two years by a total of £184,000 which will be taken off the 2006/07 allocation. This is equivalent to a one-off increase of 0.6% in council tax and is dealt with in the revenue budget monitoring report on this agenda.

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

11 Treasury Management Strategy

11.1 The Authority is responsible for approving the annual Treasury Management strategy this is attached as Appendix 6 for Members' consideration.

12 Equality impact assessment

An impact assessment has been made on the proposals in the paper and shown that they are not discriminating. They are considered compatible with the Pensions of the European Convention on Human Rights, the Human Rights Act 1998 and the Race Relations (Amendment) Act 2000.

Recommendations

1 That this Committee advises the Authority of its preferred level of budget for 2006/07 and any factors to which it would like to draw attention

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

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

4 Note that the final budget and council tax be set by the Authority at its meeting on 15 February 2006

Section 100 D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have 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.

Fire Budget 06/07