Contact: Lynn Mead ext 6344; Sharon Harding ext 6684

1 Background

1.1 At the Adult Social Care PRC 20 January 2006 Adult Services were projecting a forecast overspend of £5.7 million before taking account of mitigating management actions based on data as at 31 October 2005. The overspend was expected to be managed down to approximately £4 million. The reports identified Older Persons purchased domiciliary care, direct payments and nursing care as the core service areas contributing to a forecast gross overspend of £5.1m with £0.6m from other areas. The key reasons cited were:

· Increases in underlying levels of demand, both in 2004/05 with a full year effect in 2005/06, and in 2005/06 itself. These are due to both demographic factors and issues linked to the state of the health economy.

· The budget required efficiency savings of £2m. It is expected that efficiencies will be achieved, but whereas in other years such measures would have been available to help with the cost of increased demand, they were already assumed in the 2005/06 budget.

· The transitional cost of the Enhance project: £3.8m was budgeted for this, leaving less budget available for other demand pressures. Actual transitional costs have been higher, due to slower implementation than planned.

1.2 In light of the above factors management actions were put in place to try to mitigate the impact, but the effect of this has not been significant enough to offset the overspend.

1.3 In early February 2006 when papers were sent out for 9 February Adult Services DMT the forecast, using data to 31 December 2005, had moved to indicate an overspend of £11m, in the current financial year 2005/06. Subsequently the forward impact for 2006/07 was identified as being at least £20m, assuming repayment of the 2005/06 overspend. This position was confirmed in reports to Cabinet, Adult Services PRC and the Executive Member in March 2006.

1.4 An independent review team has been established, consisting of the Corporate Policy Unit, Treasurer's Consultancy and Internal Audit. The remit of the team was to understand why the department finds itself in this position, along with verifying any findings from the Adult Services in-house teams, exploring further measures to improve management information systems, and the ability to deliver on planned savings actions. The team was also tasked with checking that eligibility criteria are being applied as rigorously as possible and to look at radical savings options.

1.1 The full Project Initiation Document was presented to Cabinet on 20 March 2006 and detailed the three distinct phases:

· Phase 1 - To establish the facts giving rise to the current budget projection and why it was not predicted with a reasonable degree of accuracy.

· Phase 2 - To explore and report on detailed findings for specific service areas of concern within Older People and People with Learning Disabilities and identify areas for potential improvement that will help to put Adult Services spending on a sounder financial footing in the short and medium term.

· Phase 3 - To scope and plan the resources and activities required to carry out and monitor the improvement plan within Adult Services.

2 National context

2.1 To set into context the current position within Hampshire it is useful to have an understanding of the national issues facing social care departments within local authorities. A recent survey of 121 of the 150 English councils with social care responsibilities showed a severe and growing projected funding shortfall of £1.76bn¹. A combination of the following factors have contributed to this picture:

· government under funding

· demographic pressures

· local NHS cuts, particularly in Hampshire

· above inflation commissioning costs.

2.2 These funding constraints have led to an increasing shift of services away from those with `moderate' needs to just those with the most `substantial' or `critical' needs².

2.3 Sir Derek Wanless, commissioned by the King's Fund (a health think tank), released his report `Securing Good Care for Older People: Taking a Long-Term View' on the demand and supply of over 65 care at the end of March 2006. The report found serious shortcomings in social care provision and funding arrangements. It highlighted that simply keeping pace with population changes caused by increasing numbers of older people - and not seeking to improve care services or the way they are funded - would require total spending (public and private) on social care for older people to increase from the 2002 level of £10.1 billion (1.1 per cent of GDP) to £24.0 billion (1.5 per cent of GDP) by 2026.

2.4 The Local Government Association is calling for more money for local government and has welcomed the recognition in the Wanless report that health and social care are "two sides of the same coin, and that if you under fund one you overstretch the other"³.

3 The approach to Phase 1

3.1 The team has undertaken desk based research of written evidence and held face to face interviews with key personnel. There have been four areas of focus:

· Analysis of financial monitoring and reporting throughout 2005/06

· Determining why the overspend was not predicted with a reasonable degree of accuracy

· The processes for escalating the department's financial overspend position

· Underlying reasons for the continuing upwards trend of client activity and package costs.

4 Findings from Phase 1 work

4.1 Financial monitoring and reporting throughout 2005/06

4.1.1 To form a view it has been necessary to examine the sequence of events from monthly budget monitoring reports produced by the Head of Finance, Adult Services, reported to the Adult Services Departmental Management Team (ASDMT), along with reports to the Adult Social Care PRC and the Executive Member.

4.1.2 On 7 July it was reported to ASDMT, using Month 2 data (i.e. the financial picture as at 31 May 2005) that an overspend of £2.4m, and further potential pressures of £5.2m had been identified. These reports are compiled working closely with department staff and from "service commentaries" produced and approved by the Assistant Directors. A key feature of the reported position throughout the year is the "Management Action", by each Assistant Director to manage down any potential overspend to bring the expenditure in line with budget. This is standard practice and has been successful in previous years.

4.1.3 From 28 July 2005 all budget monitoring reports to ASDMT included a key section entitled "Emerging Issues and Risks" to ensure that ASDMT were aware of issues/pressures that required attention in the forthcoming periods.

4.1.4 Standard practice is for Adult Services budget monitoring reports to highlight the financial position net of proposed mitigating management action. This can understate the underlying total pressures which, whilst stated in the detail of the report, are not explained in the predicted net overspend figure for the year.

4.1.5 Key facts:

· 7 July 2005, using Month 2 data as at 31 May 2005 - the pressures identified for Older Persons was between £1.3m and £4m and management actions, such as reviewing that the right provision is made for individual care against the eligibility criteria, were put in place to manage this pressure down

· 10 November 2005, using Month 6 data as at 30 September 2005- a £6.6m overspend was forecast for Older Persons, management actions were identified to offset the overspend, although the Head of Finance recommended that the actions should be considered against a backdrop of still increasing activity. ASDMT agreed that the overspend information be put forward to the Executive Member following the next month's budget monitoring information

· 7 December 2005, using Month 7 data as at 31 October 2005 - showed an overspend of £5.7m, assuming £0.5m of LPSA grant in 2005/06 and £0.8m underspend on Management and Resources. The Head of Finance reported that strong management action needed to continue, and ASDMT agreed, to ensure that the overspend was reduced prior to the end of the financial year

· Adult Services PRC report, based on Month 7 data but not presented until 20 January 2006 - reported a budget overspend of £4m. An expected overspend of £5.5m was reported orally at the meeting.

· However at 12 January 2006, using Month 8 data as at 30 November 2005 - showed an overspend of between £6.9m and £9.1m. The range depended on the effectiveness of proposed management actions. The increase in the reported overspend from Month 7 was mainly due to increasing client numbers putting additional pressure on the Older Persons and People with Physical Disabilities budgets

· 9 February 2006, using Month 9 data as at 31 December 2005 - showed an overspend of between £10.2 and £11.6m. The increase from Month 8 was primarily as a result of revised estimates of pressures.

· Appendix 1a shows a copy of a note, sent by the Deputy Director, Adult Services, to all Adult Services Staff on 2 March 2006 explaining the budget situation and the reasons behind the £11m overspend.

The full schedule of events depicting the flow of information is summarised at Appendix 1b.

4.2 Why the overspend was not predicted with a reasonable degree of accuracy

4.2.1 The key to understanding how and why this position was not reported beyond ASDMT sooner is complex and is based on historic experience and trends whereby, in previous years overspends had been predicted but expenditure had come back in line by the year end.

4.2.2 The step changes in the reported level of overspend were mainly caused by:

· initial dampening of estimates based on historical knowledge, culture and experience and lack of confidence in system estimates

· decreasing confidence that management action could achieve target reductions

· as the year progressed and more information was available from the system the true position was established

4.2.3 Further problems were caused because of the well documented systems issues with SWIFT, the care management system, and the interface into SAP, the integrated financial system. Whilst this did not help the situation, it was not the cause of the overspend.

4.2.4 There were problems accommodating the slippage with implementing SWIFT prior to the decommissioning of the mainframe.

4.2.5 In summary the overspend position was reported monthly through the DFU budget monitoring reports to SSDMT/ASDMT, although by the time it was reported the data was up to six weeks old. There was a track record of Social Services reporting an overspend during the financial year but coming in on line at year end. The delay and optimism based on historic performance meant that the overspend was not highlighted in a timely and effective manner given the resulting level of overspend.

4.3 The processes for escalation and taking remedial action

4.3.1 There is clear written evidence of the reports made by the Head of Finance to ASDMT and Adult Social Care PRC. However, the process of compiling financial information and service commentaries for ASDMT lasts at least one month, and as can be seen from the Schedule of Events in Appendix 1b, is reporting data that is up to two months old, while the democratic reporting process adds further delay for presenting the most current position to Members.

4.3.2 It is known that the following reporting/meetings occur, some of which are not minuted and have therefore only been verbally reported to the independent review team:

· Financial reporting within Adult Social Care occurs monthly from the Head of the Devolved Finance Unit to ASDMT (minutes available)

· Reporting to Adult Services PRC typically occurs four times a year around July, September, January and March (minutes available)

· The emphasis of the ASDMT weekly diary sessions changed from November 2005 to discuss evidence supporting effectiveness of management actions

· The Head of Finance started monthly one-to-one meetings with the Executive Member for Adult Services from October 2005

· The Head of Finance meets the Deputy County Treasurer and Assistant Director, Resources fortnightly and has regular contact as necessary between meetings

· Executive Member for Adult Social Care established monthly meetings with ASDMT from October 2005

· Director of Adult Services met monthly with Executive Member from September 2005

· The Chief Executive has regular meetings with the County Treasurer and Director of Adult Services.

4.3.3 The escalation of the actual budget monitoring reported position beyond ASDMT occurs through Adult Social Care PRC and Executive Member reporting. There is no separate formal process to inform the Corporate Management Team (CMT) or Cabinet, which relies upon exception reporting of issues raised in budget monitoring reports to Executive Members. No formal budget monitoring reports were considered by the Executive Member for Adult Social Care between July 2005 and January 2006.

4.3.4 Following the Executive Member for Adult Social Care briefing 8 February 2006 the Executive Member informed the Leader of the Adult Services budget overspend position.

4.3.5 The reason for the understated position and consequential delay appears to be based on previous experience and historic culture surrounding the old Social Services department. An overspend was predicted and was known from early on in 2005/06 within the department, but was expected to be off-set by the management actions in place, under spending in some areas and the LPSA reward grant of £0.5m. It was evidenced through client demand statistics and growing evidence that management actions were not having the desired effect of reducing expenditure levels. This was exacerbated by:

· optimism based on a history of keeping within the former Social Services' cash limit, despite reporting annual budget problems during the year

· the corporate climate of not wishing to report bad news publicly without clear evidence and not believing in Adult Services reported potential overspend in the light of previous experience (as above)

· reticence relating to a lack of confidence in the financial commitments being reported via the new IT systems and associated client demand statistics.

4.3.6 The escalation process was in place and the overspend was reported as soon as it had been established that management actions were not going to effectively address the increasing size of the overspend. As outlined in 4.3.4 above the Leader was informed following Adult Social Care briefing on 8 February 2006.

4.4 Underlying reasons for the continuing upward trend of client activity and package costs

4.4.1 The causes of the overspend are consistent with the national picture and are identified as:

National and local issues

· Increase in demand caused by demographic changes. It should be noted that comparative data shows this is at average levels for older people in the South/South-East region and one of the highest for young adults

· Unquantified impact of health service climate. For example, early client transfers from health care, reduction in community nursing resulting in Adult Services picking up the care of these clients

· Cost inflation for commissioned services. Above inflation price increases from care providers, which includes the impact of statutory requirements for increased care standards.

Specific local issues

· There is concern that care package eligibility criteria may not be applied consistently across the county, with suggestions that some packages are generous/inflated and that the risk averse culture does not support frontline staff in applying professional judgement sufficiently to manage down individual care package costs. In contrast there are also reports of packages only being awarded to the most vulnerable. This will be investigated further in Phase 2. The care management process is attached at Appendix 1c.

· Unit cost analysis looking at budgeted levels for 2005/06, activity levels January 2006 and forecasts forwards into 2006/07 shows that the clear underlying trend is that the department will overspend again in 2006/07 to similar or higher levels seen in 2005/06 unless significant action is taken

· The above could be exacerbated if assumed levels of savings from the Enhance project in not buying in nursing care beds, but utilising new in-house beds as they become available, are not realised. The transitional costs from Enhance have been £4.6m, compared with the budgeted costs of £3.8m. There has also been a delay in utilising these homes as a result of staffing, the need to match clients to available facilities, and perhaps an over optimistic assumption in the first place. Consequently there has been a need to purchase an extra 60 beds from the independent sector at a net cost of £1.35m.

5 Phase 2 - Actions to take forward

5.1 Appendix 1d provides a schedule of activity planned both as part of phase 2 of this review and also within Adult Services (on its own and working with the Devolved Finance Unit).

5.2 The next phase of activity will be based on the broad conclusions reached during Phase 1 and will focus on:

· Budgetary control - review of the budget monitoring process and accountabilities; effectiveness of management actions and options for further tactics to manage expenditure; fundamental review of budget structure in relation to trends and pressures

· Managing demand- examination of the eligibility criteria and their application

· Escalation processes at all levels .

5.3 Key to progressing this work will be:

· Agreeing priorities

· Assigning resources to planned activities

· Identifying a lead responsible officer for each piece of work

· Agreeing reporting timelines.

6 Phase 3

6.1 A detailed work schedule will be drawn up of further work to be completed by Adult Services, following completion of Phase 2 work. This will need to link in with the departments' Improvement Plan and the work to be undertaken by the in-house team, led by the Deputy Director, in developing the recovery plan for the department.

7 Conclusions

7.1 There are a broad range of issues, many of which are being examined and/or addressed through the "Key Issues to take Forward" table in Appendix 1d. These can be summarised below:

· Historically Social Services has managed to balance its budget through a process of management actions and pooling of resources

· The unprecedented scale of overspend indicates that escalation procedures should be assessed with appropriate trigger points and exception routes identified

· Changing environment and pressures require closer analysis of trends, commitments and forecasts on a regular basis. Historic knowledge and experience needs to be informed by robust current analysis

· A need to improve risk assessment and accountability within the department. There are two aspects:

_ future systems require a full risk analysis with parallel interim monitoring systems put into place as necessary

_ ASDMT should own and support implementation of management actions through review and challenge to assess feasibility

7.2 There is a need for an agreed protocol with the Health Service and other providers regarding re-imbursement for client care. The specific work on developing a protocol with the Health Service has been in hand since December and will be concluded shortly.

7.3 The commitments from the £11m overspend in 2005/06 will continue into 2006/07. These together with the budgeted savings targets of £6.4m, and further new pressure, suggests that an overspend of £17-£20m will occur unless clear actions are taken to address these pressures.

7.4 The areas of work identified for Phase 2 will provide some assurance, but the fundamental issue to be addressed is the overspend already being predicted for 2006/07. Addressing the underlying problems, rather than the immediate symptoms will require a longer term strategy allowing time for actions to take effect. It may be more realistic to target recovery by 2008/09 for the department. Based on current information and trends this will require fundamental changes to service provision.