Contact: Jon Pittam, (01962) 84 77400; [email protected]

1 Introduction

1.1 This report sets out the current projection of the outturn for 2005/06 and identifies some outstanding issues to be resolved in the production of the final accounts for 2005/06, which will be reported to the Cabinet in June.

1.2 An overspending against the revised budget is forecast as a result of significantly higher spending on adult services than budgeted and although some contingency measures were incorporated in the 2006/07 budget, the implications for the County Council's financial planning in 2006/07 and 2007/08 will be dependent on the conclusions drawn from the review of the adult services budget.

1 Service cash-limited expenditure

Adult Services

1.1 As reported to the last meeting of Cabinet, an overspending of £11.3m (4.6%) on the adult services budget is forecast in 2005/06. This is higher than had been predicted both because the budget pressures appear to have been understated and because the management action taken to restrain demand appears to have been less effective than anticipated. An extraordinary review of adult services budgets is underway to identify short and medium term actions to put spending on a sounder footing.

Children's Services

1.2 The most recent children's services budget monitoring report identified a projected overspend of £285,000 (0.04%) against the cash limit. Though the overall position is very close to the cash limit and well within the forecasting margin of error this is partly fortuitous as a result of being able to redirect childcare and early years expenditure of £2.5m to take up potentially unused sure start grant, which has enabled budget pressures of £0.7m on Education and £2.1m on children's social care to be largely accommodated within the cash limit.

Environment

1.3 The monitoring report in March forecast a very small underspending of £77,000 (0.1%) against the cash limit mainly as a result of higher income on management and support services.

Policy and Resources

1.4 A small overspending of £222,000 (0.5%) is also projected on Policy and Resources, primarily as a result of higher expenses being sought by district councils to cover the costs of administering the County Council elections, for which claims have only recently been submitted, and have yet to be agreed. The projected overspending needs to be set in the context of planned underspendings of £225,000 built into the revised budget, so that overall planned spending is in line with the budget. The issue will be how the over and underspendings on the different services are balanced at the year end.

Recreation and Heritage

1.5 Outturn will be very close to the cash limit, an overspending of £6,000 being predicted, after allowing for an anticipated underspending on sport, community and outdoor services, offset by a small overspending on the library service.

2 Expenditure outside cash limits

Business rates

2.1 A small underspending is anticipated as a result of business rate refunds received towards the end of the year.

Capital financing costs and interest on revenue balances

2.2 Base rate has remained at 4.5% since August 2005 so that no significant change in short-term interest rates has occurred since the revised budget was reported. A sum of £100,000 retained within the contingency to cover the possibility of an increase in interest rates will not be required. Cashflows have continued to be more favourable than estimated and additional interest on balances of around £2m is projected.

Winter maintenance

2.3 Despite the absence of any significant snowfall this winter, the higher than usual number of days of cold weather, on which salt runs have taken place, has resulted in expenditure on winter maintenance exceeding the revised budget by approximately £0.5m. The budget is constructed on the basis of the average level of spending in the previous four years, re-priced to 2005/06 levels. As a result an increase will be required in the winter maintenance budget from within the overall highway maintenance budget in 2007/08.

Waste management contract contingency

2.4 Allocations of £3.2m from the contingency of £4.7m have been made in respect of increased waste contract costs in the first three quarters of 2005/06. Though waste volumes during this period have been slightly lower than in the corresponding period in 2004/05, increased expenditure has been incurred in dealing with waste now classified as hazardous under the hazardous waste directive.

2.5 As reported to the Cabinet in June 2005, the new system of landfill trading allowances provides the County Council with the opportunity to sell allowances within the initial trading period. The income generated from sales will be accounted for through the revenue account rather than as a capital receipt and proposals for the use of the income will be considered when the final accounts are presented. The Cabinet agreed that this income would be used to offset future council tax rises (because of the extra pressure of the waste contract, not met by Government grant in the past) and for reinvestment in future infrastructure requirements on an invest to save basis.

Other contingency provisions

2.6 The contingency includes a sum of £0.4m mainly to earmark a small part of the additional income generated by the reduction of council tax discounts on second homes for key worker housing and for the effect of the boundary review on members' expenses which will not be committed in 2005/06. The sum of £100,000 budgeted for tsunami team expenses was also not spent in full.

Insurance

2.7 The contribution to or from the insurance provision included in the final accounts is based on the value of claims paid in the year and the assessed value of outstanding liabilities. Allowance also has to be made for the cost of fire, flood and storm reinstatement carried out in the year.

2.8 The increase in school fire insurance premiums in 2005/06, more favourable trends in public and employers' liability claims and fewer recent major fires are likely to result in a lower charge to the revenue account than budgeted in 2005/06. However the increase in fire insurance premiums was intended to provide additional funding for the outstanding reinstatement of major fires, mainly at Costello Technology College, Pinewood and a contribution arising from the Woodlands fire. A decision will need to be taken when the final accounts are reported on the extent to which the insurance reserve should be increased to cover outstanding fire reinstatement, rather than being reliant on a continuation of the recent more favourable trend in the number of major fires.

Part time pensions

2.9 A provision has been contained in the accounts for some years for the estimated cost of making backdated employers' pension contributions for part time employees who have submitted claims seeking retrospective admission to the local government pension scheme. The County Council is also responsible for dealing with similar claims relating to the teachers pension scheme, and providing those claims have been handled appropriately, the Department for Education and Skills (DfES) will fund any backdated employer contributions.

2.10 The provision was revised to £1m in 2004/05. Approval was given by the Leader at his Executive decision meeting in January to fund the cost of employing Counsel and temporary additional staff to defend claims from the provision. The level of provision will need to be reviewed in closing the accounts, but at this stage no significant change would seem to be justified in 2005/06.

Provision for doubtful debts

2.11 A provision for doubtful debts is assessed at the year end based on the assumption that a proportion of debts over a certain age will not be recoverable, together with allowance for more recent specific debts which are known to be doubtful. A view will need to be taken in closing the 2005/06 accounts on the level of disputed debt mainly with the National Health Service (Section 28 agreements).

Revenue contributions to capital

2.12 The revised capital financing plan for 2005/06 approved by the Cabinet in February requires full use to be made of the budgeted revenue contributions to capital in 2005/06 of £29.9m, together with temporary unsupported borrowing of £9.3m due to the timing of capital receipts. The latest Policy and Resources monitoring report suggests that both capital expenditure and capital receipts in 2005/06 will be slightly higher than forecast, but that the overall financing position will be broadly in accordance with the capital financing plan.

Local Authority Business Growth Incentive Scheme (LABGI)

2.13 The Government has changed marginally the basis for allocating the national non-domestic rate to local authorities in 2005/06, so that a small element (less than 1%) is allocated directly to local authorities rather than being pooled and distributed as part of the formula grant. The new scheme has no effect on the level of rates paid by business. It was designed to recognize the alleged disincentive effect arising from the pooling of business rates, particularly where local authorities are concerned about the adequacy of the resources to fund the public infrastructure requirements associated with new development.

2.14 The scheme sets a threshold for business rate growth in each district council area based on the historical trend. Targets were set on the basis that areas with high rates of growth in business rateable value in the past had the most scope for further growth. If the threshold is exceeded a proportion of the income derived is retained locally, and apportioned roughly two-thirds: one-third between district and county councils. The first allocation is based on business rate growth between December 2004 and December 2005.

2.15 The County Council was notified in February of its allocation of £720,000 for 2005/06 which partly offsets the loss of formula grant of £1.7m as a result of the amending reports for 2004/05 and 2005/06 issued during the autumn. The income from LABGI had been anticipated, but not brought into account, when setting the budget as the precise amount was unknown and it was apparent the extra income would be required towards the emerging adult services overspend.

3 Summary

3.1 Latest monitoring of the budget position suggests that the position is generally satisfactory for services other than adult services. There will be some underspendings on non-cash limited budgets to offset some of the impact on balances of the projected overspending on adult services.

3.2 Subject to the outstanding issues relating to insurance, waste management, and provision for doubtful debts highlighted in the report a net underspending of up to £3m is forecast on non cash-limited budgets.

4 Adult services budget trends

4.1 The current predicted overspend for 2005/06 is around £11m. The 2006/07 budget will therefore be under extreme pressure to offset the ongoing commitments from the 2005/06 overspend and the savings of £6.4m, already built into the budget.

4.2 Demographic and cost pressures are continuing despite the increases in recent budgets. For Social Services as a whole recent increases have been.

Table 1 Social Services budget increases 2001/02 to 2004/05

4.3 Looking forward, the budget increases will reduce markedly because of the downturn both in specific grants, and the Government's national spending plans for adult services. The County Council has set budget increases in line with the spending plan increases but is constrained from adding more resource from local council tax payers because of the capping regime and its own wish for lower council tax rises in the future. The next table shows the budget increases for adult services for the period 2005/06 to 2007/08.

Table 2 - Adult Services budget increases 2005/06 to 2007/08

4.4 On a budgeted basis the rate of increases is very low compared with the historical trends for social services as a whole. This suggests that it is unlikely that these increases will be sufficient without radical restructuring in the way these services are provided.

4.5 The position is even more dramatic if the 2006/07 and 2007/08 budget increases are re-based on the 2005/06 outturn. The imperative is to get back within cash limits from 2006/07 onwards.

Table 3 - Adult Services budget increase 2006/07 compared with 2005/06 outturn

4.6 The scale of the problem is expressed starkly in this analysis. Plans need to be made to get the rate of increase in adult services spend down to a much lower level to cope with these constraints. This will be subject to further reports when the review has been completed and the accounts have been closed in June.

4.7 It is proposed that budget planning for 2007/08 and 2008/09 should start by setting provisional guidelines at Cabinet in September 2006 for all services, but with prime requirement being to recover financial stability in adult services.

4.8 The adult services problem is however a national one, exacerbated by the distributional impact of Government grant changes away from Hampshire. Lobbying needs to continue but respite, if any, will not occur until 2008/09 when the CSR 2007 will have been completed. But that only implies an overall increase of around inflation, or 2.5%, most of it targeted again to schools.

4.9 Hampshire is not alone. "Four in five local authorities are moving to tighten the eligibility rules for services for elderly and disabled people, in response to a record £1.8bn gap in funding for social care and the knock-on effects of the cash crisis in the National Health Service (NHS). The trend, which implies that 70% of councils will now offer services only to people whose needs are judged "critical" or "substantial", raises doubts about the Government's ambition to achieve a shift in health and social care provision towards a preventative agenda, as outlined in a white paper in January." (Hampshire already offers services at "critical" and "substantial" levels.) The funding gap was revealed by a joint survey of English local authorities published by the Local Government Association, council treasurers and social care directors. Eight in 10 local authorities responded.

4.10 On the basis of the survey, carried out in January when the full impact of NHS problems was only starting to bite, "there was a shortfall of £1.8bn between what councils were spending on social care services for adults and children in 2005/06 and the level of expenditure assumed by the Government in its grant allocations. Almost half the councils reported a cut in funding from local NHS primary care trusts. Councils highlighted the soaring costs of care for the ageing population, unprecedented increases in demand for services for children with learning disability and rises in fees for care homes. Eighty per cent of councils said they would be tightening further their criteria for provision of services for adults."

5 Financing the 2005/06 adult services' overspend

5.1 The 2005/06 budget included additional balances of £2m to recognise the risks in the budget, including the potential risk of an overspend by adult services. When the 2006/07 budget was set, balances were increased by £2.6m, and it is possible that a further £3m could be added when the accounts are closed in June 2006. This arises mainly from more interest on balances (£2m) and LABGI (£0.7m). Estimated balances at 31 March 2006 will therefore increase from £9.8m to £12.8m.

5.2 An additional budgeted contribution to balances of £1.8m in 2006/07 is also available to cover the risks of continued overspending by adult services in 2006/07, albeit not enough given the likely scale of the problem.

5.3 The Leader in his budget speech also added £0.5m to balances in 2006/07, as well as adding £0.5m to the budget for day centre provision by withdrawing resources planned for Hampshire Action Teams, freezing members allowances at the 2005/06 level and by seeking corporate savings of £190,000.

5.4 These two measures provide £2.3m in 2006/07 to be held centrally against overspending pressures in that year. The Leader also signalled his intention to release the £2m contingency within the 2006/07 budget for adult services by writing off £2m of the 2005/06 overspend from balances giving a total flexibility of £4.3m in 2006/07, towards over commitments from 2005/06 continuing into 2006/07 above the budgeted level for that year. Bearing in mind the total pressure of at least £11m for 2005/06 and the required savings of £6.4m, let alone further new pressures, this contingency may be insufficient.

5.5 This leaves the £11m overspend in 2005/06 to be dealt with. Firm decisions are not required now and these can be made when the accounts are closed in June. It is assumed that earmarked reserves are maintained to offset the costs of job evaluation / pay and benefits and the future grant losses in 2008/09. This leaves balances, any additional sources of income or reductions, not already built into the 2006/07 budget, as the means of balancing the books.

Balances

5.6 £12.8m is expected to have accumulated at 31 March 2006 which does cover the overall overspend leaving just £1.1m in balances after allowing for the budgeted withdrawal of £0.7m from balances in 2006/07 for one off spending. This is far too low for general purposes, let alone the risks of continued overspendings from adult services (and possibly children's services) in 2006/07. The minimum target level of balances is £7m (excluding additional risks), so around another £6m (£7m less £1.1m) needs to be found.

5.7 This could be recovered over the next two years by requiring adult services to repay the overspend. However that looks unrealistic given the other pressures and the budget trends previously explained in this report.

5.8 A firm recovery plan to re-instate balances by £6m will therefore be required when the accounts are closed in June. Options could include:

· additional in-year savings targets across services

· slowing-down the capital programme or deferring projects

· additional capital receipts

· temporary use of other reserves, business unit surpluses or other budgets, such as the book fund, which are capable of quicker in-year variation (subject to plans to re-instate them during 2006/07 or 2007/08)

· use of new income streams or specific grants (as indicated in this report and the next item on the agenda).

5.9 None of these options are likely to be palatable, but some of them may be necessary to ensure the recovery of a prudent minimum level of balances for 2006/07 given the other in-year risks from pressures on adult and children's services, and from the potential settlement of equal pay claims arising from job evaluation. In the longer run, more comprehensive, longer term savings may be required, in addition to firm recovery plans for adult services to remain within its available budget by prioritising demands instead of meeting all requirements without regard to budget availability.

6 Recommendations

6.1 The recommendations are set out in the accompanying summary decision sheet.

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.