Contact: Paul Carey-Kent, Deputy Treasurer 01962 847525

David Howells, Director of Corporate Services 02380 626833

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 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 consultation be carried out on a budget requiring a council tax increases of around 2.7%, (the level of increase in the basic state pension). This view was confirmed by Members at the Finance and General Purposes Committee last month. Accordingly, this paper sets out a budget at this level although at 2.9% it is slightly higher than the potential increase last presented to Members.

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:

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

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

· 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 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 (Note: In addition a one-off sum of £150,000 was included to fund regional collaborative activities. 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. It is now considered likely that a budget provision of £150,000 per annum will be required for such activities and it has been built into the 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 vehicles, although 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.

Firefighters' pensions - existing 1992 scheme

1.4 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.

Firefighters' pensions - new 2006 scheme

1.5 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 employee rate of 7%.

1.6 The overall effect of both schemes is to reduce the budget by £2,383,000.

1.7 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.

1.8 Details are set out in Appendix 1.

1.9 Unavoidable costs: these arise principally from legislative changes or requirements. There are now four significant issues:

· Further consideration has been given to the employer's cost of retained personnel joining the new pension scheme. The expected employers' rate is now lower that originally assumed and it is now clear that there will not be any backdating of the employer's contributions. This reduces the cost in 2006/07 to £208,000.

· 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 for improvement. 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.

· The fourth has arisen since the report to Finance and General Purposes Committee. It relates to the costs of the firefighters' pay review. It was originally envisaged that these costs could be offset by savings but now it appears less likely. This adds £340,000 to the budget.

1.10 There are now two new growth items proposed:

· To roll out station-based administrative support (eight full time equivalent posts) to retained stations. It is intended to provide this for clusters of stations so that all retained stations are supported by 2007/08. The costs are estimated to be £121,000 in 2006/07. This initiative was considered and supported by the Human Resources Committee on 29 November 2005.

· Arising from, and as a positive response to requests made at the budget consultation meetings, £50,000 has been added to the Capital Programme for buildings maintenance to ensure that there is sufficient for repairs and improvements to retained stations. It is proposed that this should be financed through the use of supported borrowing. The costs of this borrowing can be absorbed within the budget. Notes from the consultation meetings are attached as Appendix 7.

1.11Any other emerging or urgent funding requirements will need to be met from underspends and/or efficiencies.

1.12 The proposed draft budget for 2006/07 is set out on Appendix 2a. The three year budget has been updated and is summarised in appendix 2b.

2 Levels of Reserves

2.1 The Authority currently sets aside a reserve of £2m to deal with any unanticipated costs of financial risks. This level has been commended as good practice by the Audit Commission. Pensions has been a key element in determining the appropriate level of reserves. 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 reassess this for 2007/08 after the new arrangements have been introduced,especially given (see paragraph 10.2) that there are some areas of risk in the 2006/07 budget.

2.2 As reported to the Finance and General Purposes Committee, there is a budget pressure in 2005/06 which it is thought appropriate should be funded from balances in 2005/06; the impact of grant amending reports for 2004/05 and 2005/06. These are published when the Government discovers an error (not attributable to local authorities) in the data used in previous grant settlements. The 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. In order to ensure balances of £2m for 2006/07 this needs to be added to the budget in 2006/07.

2.3 Appendix 6 sets out the details behind the proposal to maintain reserves at £2m for 2006/07.

2.4 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 are:

· transitional grant reserve - for repayment of transitional funding to the ODPM totalling £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 - 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, this will be fully used by 31 March 2008.

· modernisation reserve - this was set up in April 2005 at £0.5m to help meet the costs of the modernisation agenda. Items identified to date include part funding the expansion of the IT network, the Anti Fire Detection (AFD) reduction strategy and the shift pattern change project team. If these cannot be met from within the existing budget the balance at 31 March 2007 is estimated at £225,000.

3 Proposed budget and council tax

3.1 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 and rescue authorities this is the change in financing pensions: and in Hampshire's case this removes £2,388,000 bringing the 2005/06 budget requirement down to £57,878,000. Therefore the proposed budget represents a 2.9% increase in both the budget and council tax.

3.2 The 2006/07 budget needs to be considered in the medium and longer-term context as the Authority moves forward with the modernisation agenda. The Integrated Risk Management Plan (also on this agenda), gives some of this context. Members have expressed a preference that council tax increases should remain as close as possible to general inflation and in particular the increase in level of pensions. It makes sense to look at this over the three-year period too, given that there will always be some fluctuations year-on-year in the match between how the Authority most efficiently sets its budget and changes in inflation levels. Looking over the period that the Authority has set its own council tax would give the following broad framework:

	Council tax increase %	Pensions increase %
2005/06	1.6	3.1
2006/07	2.9	2.7
2007/08	3.8?	2.7?
Average over 3 year period	2.8?	2.8?

3.3 This framework would indicate that within that rolling average there may be some scope to react to particular pressures in 2007/08 through an above inflation increase in the council tax, although it would also give more flexibility going forward if that increase, too, could be constrained. Overall, this approach is also likely to be consistent with the Authority's stated aim of maintaining its council tax and expenditure per head of population in the lower quartiles of all fire and rescue authorities.

3.4 Due to the calculations required in order to set a council tax which can be applied to all council tax bands in whole pence, an exact 2.7% increase is not an option: the choices are between 2.59%, 2.76% and 2.94%.

3.5 On this basis the proposed budget which represents an increase in council tax of 2.94% can be summarised as:

	£'000
Base budget	58,921
Unavoidable costs	728
Growth items	121
Reinstatement of balances	184
Transitional Grant reserve	-394
Total draft budget	59,560

4 Savings and efficiency measures

4.1 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 diverting resources from `responding' towards `preventing' and `protecting' in line with the Authority's corporate aims.

4.2 There are two possible ways of achieving this:

· through underspendings in 2005/06 and using these 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

· through efficiency gains. The annual efficiency statement for 2004/05 demonstrated that 1.3% (£717,000) of potentially cashable efficiency gains were made to enable reinvestment in other priorities. With planned gains of 1.22% in 2005/06 (£709,000), this leaves a further 3.22% (£1,801,000) to be found by 2007/08. It is hoped to identify these principally through implementation of proposals in the Integrated Risk Management Plan (IRMP) due to be considered by the Authority at this meeting. It is assumed at this stage that this will meet the Gershon targets, but that any potentially cashable savings achieved will in practice be diverted into additional `preventing' and `protecting' activities, e.g. more home fire safety checks. In terms of the budget requirement the effect will therefore be neutral.

4.3 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.

5 Government initiatives

New Dimensions

5.1 Notification of New Dimensions grant funding for 2005/06 and 2006/07 has recently been received.

5.2 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 ODPM are currently working on the levels of funding for 2006/07 and notification is expected soon. A similar figure to 2005/06 has been included in the draft budget for 2006/07 and is matched by expenditure.

5.3 Grants of £35,000 (£35,000 in 2005/06) for incident response unit training and £18,800 (£42,500 in 2005/06) for USAR personal protective equipment are to be received. When decisions have been made how the grant will be spent the income and expenditure will be included in the budget.

5.4 The costs of providing USAR training facilities and accommodating USAR equipment at the Headquarters site are subject to further discussions with the ODPM. Notification is expected later in the year (see paragraph 10.6).

5.5 A grant of £22,400 has been agreed for a hard standing at Hardley Fire Station in 2005/06 to accommodate a New Dimensions prime mover. This will be added to the capital programme when the grant is received.

Fire Prevention

5.6 A grant of £138,000 has been recently announced for 2006/07 and 2007/08 replacing the former Arson Forum Co-ordinator grant of £35,000 per annum. It is to support fire prevention work including community fire safety, arson reduction and work with young people. When decisions have been made as to how the grant will be spent the additional income and expenditure will be incorporated into the budget.

Fire Control New Burdens

5.7 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 Room 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 the costs and plans for migration, but about which there is insufficient clarity: 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

5.8 Firelink is a national project to replace existing or planned local and regional replacement radio projects. 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.

6 Capital Spending

6.1 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 £3,319,000 in 2007/08.

6.2 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

6.3 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

6.4 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. As reported at previous meetings of the Authority and at the Finance and General Purposes Committee; additional building works to provide accommodation for the ODPM-funded Urban Search and Rescue vehicles and equipment together with practical training facilities; and for additional compartment fire behaviour training facilities jointly funded by West Sussex County Council, are being explored. The Authority has previously agreed to the negotiation of a single tender for these additional works with the main (on-site) contractor. The Authority is asked to approve that delegated authority be given to the Chief Officer - in consultation with the Chairman - to let appropriate contracts for these additional works subject to necessary external funding streams being confirmed; and subject to the details being presented to a future meeting of the Finance and General Purposes Committee. The works are briefly outlined in the following paragraphs.

Compartment Fire Behaviour Training facilities (CFBT)

6.5 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 County Council 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

6.6 This facility is to be funded by the ODPM but exact funding arrangements have yet to be confirmed. In order to retain maximum flexibility it is suggested that this is added to the main headquarters scheme. £300,000 of revenue contributions have been identified in 2005/06 to finance the scheme.

7 Capital financing

7.1 The revenue effects of the proposed capital programme do not add to the budget in 2006/07 but add £191,000 in a full year.

7.2 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.

7.3 Appendix 4 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.

.

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

8 Grant settlement

8.1 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%.

8.2 Each £1m increase in spending adds £1.64 per year to the Band D council tax.

8.3 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.

8.4 As discussed above, the Government has published Amending Reports for 2004/05 and 2005/06 grant settlements. This is equivalent to a one-off increase of 0.6% in council tax.

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

9 Treasury Management Strategy

9.1 The Authority is responsible for approving the annual Treasury Management strategy. This is attached as Appendix 5 for Members' consideration.

10 Local Government Act 2003 - S.25

10.1 Under S.25 of the Local Government Act 2003 the Chief Financial Officer has to report to the Authority when setting its council tax on two issues:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget.

Members are required to have regard to this in approving the budget and council tax.

Robustness of estimates

10.2 The estimates have been prepared on an incremental basis based on existing commitments, adjusted for inflation and any approved savings or service developments taking into account factors such as past trends in operational incidents, staff increments and revenue effects of the capital programme. With the effective budgetary and management control arrangements that are in place, the majority of the budget can be regarded as robust. However, a few budgets such as wholetime and retained firefighters' pay are higher risk because spending in 2006/07 is heavily influenced by factors such as job evaluation, activity levels and possible take up of the new pension scheme which are more difficult to predict. The level of reserves recommended takes these factors into account.

Adequacy of reserves

10.3 Included within this draft budget are proposals to replenish the level of reserves to £2m. Given the assessment of risk associated with the Authority's budget set out above, this represents an adequate level of reserves.

11 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 Provisions of the European Convention on Human Rights, the Human Rights Act 1998 and the Race Relations (Amendment) Act 2000.

Recommendations

1 That the revenue budget as set out in Appendix 2a be approved.

2 That the capital programme as set out in Appendix 3 be approved.

3 That the total budget requirement for the general expenses of the Authority for the year beginning 1 April 2006 be £59,560,000

4 That the Authority's basic council tax for the year beginning 1 April 2006 be £53.64.

5 That the Authority's council tax for the year beginning 1 April 2006 for properties in each tax band be:

Band A	£35.76		Band E	£65.56
Band B	£41.72		Band F	£77.48
Band C	£47.68		Band G	£89.40
Band D	£53.64		Band H	£107.28

6 That precepts be issued totalling £32,748,548.13 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the Authority, in proportion to the tax base of each billing authority's area as determined by them which are set out below:

Basingstoke and Deane Borough Council	60,116.70
East Hampshire District Council	46,626.44
Eastleigh Borough Council	42,628.47
Fareham Borough Council	41,536.00
Gosport Borough Council	26,476.40
Hart District Council	36,860.00
Havant Borough Council	42,327.00
New Forest District Council	71,105.30
Portsmouth City Council	57,623.10
Rushmoor Borough Council	29,980.50
Southampton City Council	64,534.00
Test Valley Borough Council	44,503.00
Winchester City Council	46,207.85
	610,524.76

7 That the Prudential indicators set out in Appendix 4 be approved.

8 That the Treasury Management Strategy set out in Appendix 5 be approved.

9 That delegated authority be given to the Chief Officer, in conjunction with the Chairman, to approve extensions to the contract for the Headquarters' building development scheme involving vehicle and equipment accommodation and training facilities for the Urban Search and Rescue Team, and extended training facilities for compartment fire behaviour training, subject to the necessary external sources of funding being confirmed and subject to a report back on progress to the next appropriate meeting of the Finance and General Purposes Committee.

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

List of attached Appendices