Contact: Jon Pittam, (01962) 84 7400; [email protected]

2 Revised budget 2006/07

2.1 There is no formal review of the revised budget as budgets are monitored regularly during the year and changes, with required action, reported as they occur. All services, with the exception of Adult Services given its two year recovery plan, and Children's Services are controlling estimates to their cash limits for 2006/07.

Adult Services

2.2 The extra commitments on Adult Services of £11.1m in 2005/06 were written off to reserves and balances. The Cabinet reviewed the 2006/07 budget position in the light of the projected full year effect of these commitments, in July 2006. The 2006/07 cost was about £19m but the projection in July was for an overspend of around £17.5m

2.3 Cabinet agreed to find cash savings of £14.5m to reinstate balances. £3.5m was required to restore balances to the minimum position from the 2005/06 overspend and £11m was set aside against the minimum risk of an overspend on Adult Services in 2006/07.

2.4 A two year recovery plan was set for Adult Services targeting £4.5m additional savings in 2006/07 and £8.4m in 2007/08 (now revised to £9.3m). The projected overspend at that time, if the savings were achieved, was between £11.5m and £15.5m, against which Adult Services also retained a contingency of £2.5m within its budget.

2.5 The latest projection is for an overspend of £10.9m, without the full use of the £2.5m contingency retained by Adult Services. The Executive Member has requested that any remaining balance of the 2006/07 contingency at the year end (currently £1m) be carried forward to 2007/08 to offset pressures in that year (provided that the overall impact on balances does not exceed £10.9m).

2.6 It is also recommended that the overspending of £10.9m be written off to balances, set aside for that purpose, subject to confirmation of the final outturn. This is just within the £11m minimum risk position set aside in July, with £13.3m provided in total.

Children's Services

2.7 There is a projected net pressure of £3m, mainly from the costs of children looked after. Action has been taken to prepare a recovery plan reducing the projected overspend to £1.5m. Following a review of the children's centres revenue funding it has been possible to identify £1m of general sure start grant that can be used to offset other early years expenditure. This leaves a remaining revenue budget pressure of £561,000. It is recommended that this be carried forward to 2007/08 and absorbed within the Children's Services budget, partly by applying the one-off use of £233,000 of local public service agreement reward grant. The balance of £328,000 will be carried forward against the schools budget as agreed by the Schools Forum.

Environment

2.8 Slippage of projects within highways maintenance, totalling £390,000 has been identified. These include the initial consultancy and other costs of the street lighting private finance initiative (£250,000), tree management (£100,000), and an IT system for traffic management (£40,000). There has also been slippage in the transport asset management plan of £100,000. It is recommended that the total amount of the projected underspend, £490,000, is carried forward to allow the projects to continue in 2007/08.

Policy and Resources

2.9 Pressures totalling £359,000 mainly within property services will be managed within the overall approved revenue and capital budgets.

Recreation and Heritage

2.10 Pressures of £0.5m for the library restructuring and reduced levels of income are being managed by a recovery plan and will be contained within the overall cash limit.

Summary of service revised budgets

2.11 The proposed carry-forwards to 2007/08 are therefore:

Table 4: Proposed service carry forwards to 2007/08

South Hampshire Rapid Transport (SHRT)

2.12 The Department for Transport has recently agreed to repay 75% of the SHRT abortive costs incurred by the County Council and Portsmouth City Council. This is further split between the two promoters in the agreed 70:30 ratio, and includes an interest element.

2.13 The County Council's share is £3.1m. Part of this reimbursement, £499,000, was anticipated in 2005/06, and used to finance the continuing costs of the project team in that year, pending final decisions. This leaves £2.6m to be brought into account for 2006/07. It is proposed to add the reimbursement to balances.

Revenue contributions to capital, capital financing and interest on balances

2.14 The capital programme report shows that capital expenditure in 2006/07 is forecast to exceed resources by £4.9m. It is proposed that this shortfall is met by temporary borrowing which will be repaid in 2007/08 if anticipated capital receipts are realised.

2.15 Part of the package agreed by Cabinet in July 2006 to increase balances was to delete the provision of £5m in the 2008/09 capital programme (by adjusting revenue contributions to capital) for the acquisition of an interest in the land at Manydown. This cannot now be achieved in 2006/07 because of increased prudential (temporary) borrowing and the full use of budgeted revenue contributions to finance capital expenditure in that year. This will reduce balances by £5m, but it may be possible to reverse the position by 2008/09 when the anticipated capital receipts do become available and this has been assumed in the capital financing estimates and in the medium term financial plan.

2.16 However there is a saving of £0.4m on capital financing costs in 2006/07 from the final outturn for 2005/06, compared with the estimated position at the time the budget was prepared, after taking account of higher interest rates.

2.17 Additional balances and increasing interest rates will result in more interest on revenue balances of around £2m, which will be added to balances.

Balances

2.18 A budgeted contribution to balances of £2.3m was provided in the 2006/07 original budget in anticipation of a risk of an overspend on adult services. This will not be required based on the latest projection of the outturn. This amount, together with a slightly smaller amount which was withdrawn from balances set aside in July, can now be retained in balances to cover continuing risks of an overspend on adult services in 2007/08.

2.19 Taking account of minor adjustments between reserves, and an adjustment required for the projected overspending on the schools budget results in a total addition to balances of £2.4m in 2006/07 as compared with the strategy agreed in July, summarised in the next table:

Table 5: Further additions to balances in 2006/07

2.20 All the changes in service and other budgets are set out in Appendix 2.

3 2007/08 formula grant settlement

3.1 There has been no change in the formula grant for 2007/08, as expected, and despite the County Council's response to the provisional settlement. No attempt has been made by Communities and Local Government to answer any of the points raised in the County Council's letter which was just acknowledged.

3.2 Formula grant for 2007/08 is therefore confirmed at £122.7m, a £3.2m (2.7%) floor grant increase over 2006/07.

3.3 In announcing the final settlement the Local Government Minister said that:

· "new multi-year settlements provided local authorities with a stable and predictable funding base

· it had always been clear that the settlement for 2007/08 - second year of a multi-year settlement - would not be changed from that previously published for consultation on 28 November 2006, except in exceptional circumstances. No such exceptional circumstance had been found in the representations that he had received."

3.4 The Minister warned local authorities there was no excuse for excessive council tax increases:

· "This brings the total increase in money from Government to local authorities including schools to 39 per cent in real terms from 1997 to 2007/08.

· Given this substantial investment, we expect again to see the council tax increase in England below 5 per cent. As in previous years, we are prepared to take capping action to deal with excessive increases.

· No authority should be complacent about the Government's resolve in this matter - this includes requiring authorities to re-bill if that proves necessary."

3.5 The 39% increase in real terms is acknowledged, but most of that has been allocated directly to schools. Excluding specific grants the amount is equivalent to 14%. This has been required to cover the areas where costs and clients are increasing far more rapidly - in waste and adult services particularly. Nationally there has been a 43% increase in personal social services in real terms since 1997/98 and a 60% increase in waste costs since 2001/02. The numbers of people over 85 are estimated to go up by over 3% per year and adults with learning disabilities by 12% by 2011. Waste volumes continue to increase by 3% per year, landfill tax by 15% per annum and increased costs of 10% per annum may be needed to meet landfill targets. The grant for these demand led services, and their increasingly complex and costly needs have far outstripped Government formula grant increases and will continue to do so into CSR07 to an even far greater extent.

3.6 Full details of this settlement are contained in Appendix 1.

3.7 As in most years equivalent adjustments are required to both budget and grant figures to reflect changes made by Government in calculating the grant floor. These total £0.8m and include: adjustments for capital financing to reflect some changes from borrowing to capital grant; transfer of part of the preserved rights specific grant to formula grant; and the transfer out of formula grant for the waste electronic and electrical equipment regulations.

Table 6: adjustments to 2006/07 budget and grant

4 2007/08 base budgets

4.1 The base budget assumptions make allowance for pay and price increases. The overall base budget is £586.5m after taking account of specific grants. This is an increase of 3.3% on the adjusted budget for 2006/07 which represents the continuation of the current financial policies of the County Council.

4.2 Details of the construction of the base budget, for services and for other budgets, are set out in Appendix 3. The details of significant variations in service spending are contained in annexes A - E of Appendix 3 as submitted by Executive Members to Cabinet within the base budget guidelines.

5 2007/08 budget guidelines and guidelines for 2008/09 and 2009/10

5.1 Cabinet agreed provisional budget guidelines in September 2006 and confirmed them in December 2006.

5.2 The principles behind the guidelines set in February 2006 remain unchanged across all years:

· dedicated schools grant only for schools, with use of all other specific grants on schools and other services

· increase for all services in accordance with the County Council's base budget rules

· additional increases for

- adult services (now equivalent to 4.3% per annum after the additional £6m agreed in July 2006)

- children's social care (based upon 2007/08 national spending assumptions)

· redeployment within each service of any further cashable efficiency improvements identified in 2007/08 towards new priorities and pressures

· no other provision for any new service developments unless funded by cash savings

· all proposals for additional spending, however financed, met by a summary business case containing clear financial and performance data setting out how performance will be improved and value for money achieved, and how it links to the three priorities of the corporate strategy

· services are also required to identify annual efficiency savings of at least 2.5% per annum for the annual efficiency statement

· income to be maximised by reviewing charges at least in line with the average inflation on the related spending, and introducing new income wherever possible taking into account powers to charge for discretionary services.

5.3 For 2007/08 inflation assumptions are:

· 2.25% for pay together with the planned increase in the employers' contributions to the Local Government Pension Scheme (LGPS) from 275% to 295% of the employees' contribution (i.e. to 17.7% of payroll costs)

· 2.5% for non pay

5.4 For the later years

· 2% for pay awards with no increases for LGPS employers' costs

· 2.5% for non pay

5.5 Savings are required in addition for

· budget transfers in respect of the phased introduction of Hants Direct

· reduction in the workforce plan towards the anticipated cost of the new pay framework from 1 April 2007

· guideline redistribution of £1.1m from all services towards the £6m increase in the adult services guideline

5.6 The savings required within service guidelines are

Table 7: Service guideline changes 2007/08

5.7 Table 2 in the Executive Summary (paragraph 1.13) shows the increase in the council tax funded guidelines for each service. However services will also be able to increase spending commensurate with additional specific grants, and the impact of these are shown in the next table.

Table 8: Total cash increase in service guidelines

5.8 These increases can also be expressed in percentage terms

Table 9: Percentage increase in service guidelines

5.9 These tables show

· the 5.8% overall increase in the schools budget from DSG (see paragraph 1.9)

· specific grant increase boosting the overall cash increase for the local education authority (LEA) and children's social care in particular to 5.4%

· waste contract costs continuing to increase substantially by 6.9%

· priority given within the County Council's own funding streams of an overall 5.8% increase in Adult Services, but because specific grants on this service have only marginally gone up by 0.6%, the overall increase is 4.6% in spending terms.

5.10 The increased use of ring-fenced specific grants, especially DSG, has allowed the Government to divert funding towards its, rather than the County Council's local priorities and needs. As suggested earlier in the report the more rapidly increasing numbers of older people and adults with disabilities who need care because of demographic pressures, and the increased costs of meeting landfill directives, have resulted in these costs being met by council tax payers as they are ignored in Government formula grant.

5.11 Locally the cumulative cash increase in adults and children's social care has now increased by 75% and the waste contract by 80% over the period from the 2001/02 budget to the guidelines set for 2007/08. The inflation rate in Government terms over this period is a much lower 22%, and the County Council's formula grant (adjusting for function and funding changes) has risen by only 34% over the same period.

Table 10: Cumulative cash increases in services since 2001/02

(1) General grant to 2005/06, DSG afterwards

5.12 Total service guidelines for 2007/08 and the following two periods, with the cumulative percentage increase over the three years are

Table 11: Summary of service guideline cash limits 2007/08 - 2009/10

5.13 Executive Members have submitted budgets within the cash limits set by the budget guidelines.

5.14 Full details of the proposals for additional spending, and redeployment of resources to contain these within the approved budget guidelines are set out in Appendix 4. The increase in DSG has been summarised in paragraph 1.9.

5.15 Total growth proposals for all services are £25.7m. For Adult Services and Children's Services, the guidelines allow for additional growth over the base budget. Excess growth for these services and for all other services have been met by changing priorities and finding other savings. The required savings within the guidelines were £3.1m. In total £21.4m of savings and redeployments have been found to meet both the required target of savings and the additional growth above the cash limit.

5.16 The overall position was summarised in table 1, para 1.12 of the Executive Summary to the report, showing

· pressures of £25.7m

· offset by growth allowed of £7.4m

· required savings of £3.1m

· net redeployment of £21.4m

Growth proposals

5.17 The pressures for each service, totalling £25.7m are set out in Appendix 4 and are summarised below

Adult Services (£19.9m)

· demographic pressures, principally costs of £2.9m on adults with learning disabilities (£4.4m in total)

· higher current care levels than budgeted in 2006/07 on; older people (£9.6m); learning disabilities (£3m); and physical disabilities (£1.7m) (£14.3m in total)

· inflationary pressures above 2.5% (£0.6m)

· other service pressures (Enhance, joint equipment service and mental health) (£0.6m in total)

Children's Services (£2.8m)

· non county placements and independent fostering agency costs (£1.5m)

· in-house fostering (£0.5m)

· home to school transport (£0.3m)

· other children's social care pressures (£0.5m)

Environment (£1.1m)

· street lighting PFI, additional preparation costs (£0.3m)

· public transport costs (£0.4m)

· other additional costs over price inflation etc (£0.4m)

Policy and Resources (£1m)

· pay and benefits implementation costs (£0.7m)

· additional staff to generate extra capital receipts (£0.3m)

Recreation and Heritage (£0.9m)

· libraries restructuring and loss of income (£0.6m)

· Winchester Discovery Centre and Bursledon Library (£0.1m)

· Policy fund (£0.2m)

Savings required in the guideline (-£3.1m)

5.18 The required savings in respect of pay and benefits realisation (-£2m) and guideline redistribution (-£1.1m) have been met within the redeployment proposals. The workforce implications are identified in paragraph 8.

Redeployment and savings (-£21.4m)

5.19 The net redeployment cost savings for each service (including the required savings) are also set out in Appendix 4, and the main areas are

Adult Services (-£14.4m)

· second year of recovery plan (-£9.3m). These cover: day care modernisation; high cost placements, residential review, individualised budgets and domiciliary care for learning and physical disabilities (-£1.8m); domiciliary care purchases, day care, meals on wheels, nursing and better housing solutions for older people (-£4.2m) and income from non-residential charging (-£3.3m)

· further efficiency savings from improved procurement and management savings (£2.6m)

· further income raised (£0.4m)

· reduction in contingency (£1.5m)

· staffing savings (£0.6m)

Children's Services (-£2.6m)

· community education (-£0.3m)

· business units core funding (-£0.2m)

· interest on school balances (-£0.1m)

· other LEA savings (-£0.4m)

· equalisation of market supplements for social workers (-£0.2m)

· restructuring changes (-£0.3m)

· fostering service investment return (-£0.3m)

· other social care savings (-£0.5m)

· use of public service agreement reward grant (-£0.2m)

Environment (-£1.6m)

· bus subsidies and public transport (-£0.7m)

· review of priorities within highways maintenance (-£0.7m)

· staff and support costs (-£0.2m)

Policy and Resources (-£1.6m)

· staff savings (-£0.6m)

· use of job evaluation transitional costs reserves for pay and benefits costs (-£0.7m)

· invest to save funding for capital receipt generation (-£0.3m)

Recreation and Heritage (-£1.2m)

· 4.2% reductions across all services, primarily staffing costs including £1m from the library service restructure

5.20 Despite the redeployments required to keep with the cash limits set by the budget guidelines there remain substantial budget increases for waste, Adult Services and Children's Services, as shown in table 2, paragraph 1.13.

5.21 It is also worth pointing out the differential impact on service growth within Adult Services from the substantial increase in the cost of complex care packages for adults with learning disabilities as shown below

Table 12: Adult services - percentage increases

6 Efficiency savings

6.1 The total cash redeployments in the budget are £21.4m.

6.2 Not all these are eligible as cashable efficiency savings for the annual efficiency statement which requires at least a 2.5% efficiency improvement in 2007/08, of which 50% (i.e. 1.25%) must be cashable. Other cashable efficiency improvements, which are not included in the budget (the best example being increments on pay scales which are not budgeted for, but offset by managing vacancy levels) can be counted in the annual efficiency statement (AES).

6.3 Appendix 5 includes the details of the efficiency improvements and is split into 4 categories

a. AES and budget cash savings

b. AES eligible, but no budget cash savings

c. budget saving, but not eligible for AES

d. non cashable efficiency improvements for AES only.

6.4 The efficiency improvements reported by Executive Members are

Table 13: Efficiency improvements 2007/08

6.5 The total of efficiency savings included in the budget is therefore £15.3m (a + c).

6.6 The total efficiency improvements which are eligible for the AES are £12.5m (a + b + d).

6.7 The total of all efficiency improvements is £19.9m (a + b + c + d).

7 Annual review of charges and maximisation of income

7.1 Fees and charges have been raised where there is scope to do so in policy and financial terms, and the inflation allocation has been calculated on the basis that charges are increased in line with the allowance for inflation on gross expenditure, averaging 2.7%.

7.2 Details of income reviews and charges made are set out in Appendix 6 and in summary below

Table 14: Summary of income from fees and charges

8 Workforce plan

8.1 The workforce plan will be developed in the context of the corporate strategy and the budget. The details of the workforce costs and proposed changes in 2007/08 are set out in Appendix 8B. Appendix 8A summarises changes in the overall workforce supported by the budget.

8.2 The overall budgeted variation in workforce costs and numbers in relation to the savings and redeployment proposals is shown next. There is an increase of 288 posts in the base budget, including 90 additional posts in schools, however reductions of 336 posts are included within service growth, savings and redeployment proposals, producing a net reduction of 48 FTEs in the workforce, or of 138 in the non-school workforce.

Table 15: Summary of savings and redeployment proposals affecting workforce costs and numbers

8.3 The reductions required to meet the savings for pay and benefits are contained in table 15 and are separately reported in the next table

Table 16: Summary of pay and benefits realisation savings 2007/08

9 Additional resources and budget proposals

9.1 There are a number of changes to the provisional budget since guidelines were set in September. These are of both a one-off and a continuing nature.

One-off changes

9.2 District councils during January 2007 notified an unprecedented increase in the collection fund surplus (i.e. more council tax collected than anticipated and the County Council's share will be paid over in 2007/08 on a one-off basis). The extra amount above that forecast is £3.2m. This is the highest amount notified over the last ten years and is likely to drop again in 2008/09. £2.7m is assumed to be one-off, but £0.5m is being built into 2008/09 and future budgets and forecasts on a continuing basis.

9.3 The local authority business growth incentive scheme (LABGI) continues for a further year in 2007/08, before the scheme is reviewed as part of CSR07. It is difficult to predict the amount that may accrue and it will not be confirmed until February 2008. However, it is likely that future income will accrue in 2007/08 and £1m has been assumed on a one-off basis for 2007/08 (at the same level estimated for 2006/07).

9.4 The schools budget overspend of £0.3m in 2006/07 will be recovered from DSG in 2007/08 (see table 5).

9.5 The net addition to balances from these changes is therefore £4.0m.

Table 17: Addition to balances from one-off changes in 2007/08

Continuing changes

9.6 There is a £2.3m increase in the tax base which has gone up by 1% in total compared with the estimated 0.5% in the guidelines (from 488,400 band D equivalent dwellings to 493,200), and as mentioned in paragraph 9.2, £0.5m from the surplus on collection funds.

9.7 There are also a number of other base budget variations since the guidelines were set which are detailed in Appendix 3. These include a minor increase in the cost of inflation assumptions (£47,000), additional costs from transfer of preserved rights and educational psychologist training to be met from formula grant (£289,000) and other minor variations which save £158,000. These have the net effect of increasing spending by £178,000.

9.8 There was a remaining unallocated contingency of £485,000 in the provisional guidelines which can now be released to balances as well.

9.9 However since the guidelines were set there has been an increase in interest rates (it is proposed to budget for interest rates of 5.5% on average in 2007/08) and other variations which add £0.7m to capital financing costs.

9.10 It is proposed to add £780,000 to the budget to provide resources for Hampshire Action Teams (HATs) during 2007/08, subject to appropriate protocols and a review of the value for money of the spending incurred, and to make a budgeted contribution to the invest to save reserve of £0.7m (see paragraph 1.3).

9.11 The net effect of these continuing changes is to add about £1m to balances on a continuing basis.

Table 18: Budgeted contribution to balances in 2007/08

10 Performance and risk management

10.1 As part of the process of linking budgets more closely with performance management, proposals for additional spending should indicate measurable improvements in performance anticipated and any significant savings proposals should include a plan showing how the proposal will be implemented.

10.2 This is a key feature of the Corporate Assessment by the Audit Commission. It is therefore necessary for all Executive Members to review their plans and monitor achievement against them during 2007/08 for all the proposed growth and redeployment proposals set out in Appendix 4, and especially to monitor performance against specific plans for achieving all savings targets. Executive Members should also have explicit regard to the value for money of all their decisions.

10.3 The revised corporate strategy and its accompanying corporate business plan provide the framework within which the integration of service, workforce and financial planning has been developed. The budget proposals recognise the development priorities in the corporate business plan set within the context of the financial pressures identified within the financial context to the plan. A medium term financial strategy will be presented to the Cabinet during the Spring which will bring together the medium term financial plan and the various other elements of the County Council's financial strategy, highlighting the links with the local area agreement and other joint plans agreed with partners and with the corporate business plan. This will be developed further into a medium term financial plan in the Autumn when the outcome of CSR07 is known.

10.4 Section 25 of the Local Government Act 2003 requires the Chief Financial Officer (the County Treasurer) to report to the County Council when setting its council tax on:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget

10.5 The County Council is required to have regard to this report in approving the budget and council tax. It is appropriate for this report to go first to Cabinet and then to be made available to the County Council in making its final decision. The full report is set out in Appendix 13.

10.6 The main areas of risk are

· equal pay claims arising from job evaluation in 2007/08

· the impact of CSR07 over the two year period from 2008/09 onwards

· further formula grant loss of up to £38m from 2008/09, if floor grant is removed in part or in whole

· any changes to council tax, revaluation, or in the Council's balance of funding between grant and council tax, as a result of the delayed implementation of any changes arising from the Lyons inquiry over the CSR07 period

· achievement of cash savings, especially on Adult Services

· risks from the budget assumptions, especially on inflation and the achievement of capital receipts

· inherent volatility from demand led budgets in Adult Services and Children's Services

10.7 General balances are used to cover such risks. In addition there are a number of specific reserves earmarked for particular purposes. The protocol for earmarked reserves, setting out the purpose, use, management, control and review of each reserve is detailed in Annex 1 to Appendix 10. This is a key component of the Section 25 report.

Job evaluation

10.8 The budget strategy provides for the full year effect of job evaluation under the single status agreement when it is implemented from April 2007. The estimated full year cost remains around £10m. £7.5m of that continuing cost will be met from the budgeted contribution that was initially made to the grant equalisation reserve, and was switched into the job evaluation transitional cash reserve for 2006/07. The remaining £2.5m will be met by a benefits realisation effected by reducing workforce numbers or by increasing productivity. There will be no additional cost to the council tax payer as a result of this strategy.

10.9 The job evaluation transitional costs reserve was initially built up to recognise the need to fund the project costs to effect the changes, and to provide some cover for transitional costs while protection of existing salaries occurred where job evaluation resulted in a lower grade. It was then necessary to set aside provisional sums for back pay or compensation arising from job evaluation. During 2006 court cases have led to a serious deterioration in the potential costs arising from equal pay claims and grievances both pending and after the implementation of job evaluation. It is not possible at this stage to estimate the potential liability. Increased claims and litigation will also increase the Council's costs in defending actions.

10.10 The job evaluation reserve was £10m at 31 March 2006 and this will now increase to £17.5m at the end of March 2007. It is anticipated that estimated costs of the job evaluation team and other implementation costs will need to be drawn down from the reserve during 2007/08, together with any claims that become payable together with associated legal costs, and the estimated balance will fall to around £17m.

10.11 There is a strong risk that the liability might exceed the provision made, after costs, and it will no longer be possible to continue increasing the reserve as the budgeted contribution will be switched to meet the additional on-going costs of job evaluation. The provision in the reserve is not an assessment or acceptance of liability and if it is not required in full when the position becomes clearer, it will then be possible to reduce the reserve and use the resources for other purposes.

10.12 The Government has confirmed that it will set aside normal accounting requirements so that the liability does not need to be acknowledged for council tax setting purposes until the expenditure is incurred. In this way costs can be spread over a longer time scale as they are paid out, allowing cash flow to be managed. There is a possibility of a capitalisation directive being agreed by Government in extreme cases. But that is subject to a national cap and requires reserves to be utilised first. Any capitalisation directive issued may also be restricted by the availability of capital receipts which could finance the expenditure. It would therefore be better to provide adequate resources from reserves as and when any payments become due.

CSR07

10.13 The CSR07 settlement will be tight nationally with a 1.9% real term increase in all public spending. Government is suggesting 3% cash savings from the base line. If schools, health and police continue to be given higher priority, there is likely to be very little grant increase left nationally for other services - perhaps less than 1%. The effect on authorities at the grant floor could be worse. At present the medium term plan assumes formula grant continues at its existing cash value (i.e. no increase). There is a possibility that grant could reduce in cash terms (a negative grant floor). It is not anticipated that there will be further formula grant changes, but there could be some further unwinding of the floor leading to grant loss over the three year period. This needs to be seen in the context of a grant floor of £38m at risk for the County Council (this is 31% of the total grant support received in 2007/08).

10.14 Another risk to the medium term financial plan assumption of nil increase in formula grant is any fundamental changes to the current balance of funding (by rebalancing the national grant : council tax ratio for those authorities with DSG). The County Council now only receives 20% formula grant support, other authorities without schools still retain much higher grant support. Such a rebalancing is unlikely to favour the County Council on past trends, at least as long as its grant increase is at the floor.

10.15 The medium term plan also assumes 5% council tax rises in each of these years. To the extent that capping limits are tightened or local political choice is made for a lower council tax rise, then cuts in services over and above those already planned would be required.

10.16 Given the uncertainty with CSR07 it is proposed to retain the grant equalisation reserve of £25m intact during 2007/08 subject to the results of CSR07, and after any firmer costing of the liability from equal pay claims, it would be possible to plan the unwinding of the reserve over the CSR07 period to

· avoid the cliff edge of grant loss (£38m)

· guard against sudden cuts if the financial forecast worsens

· provide flexibility if lower council tax rises are enforced or required

· provide for further pressures on Adult Services and Children's Services for 2008/09 when recovery plans, modernisation and restructuring have been completed during 2007/08.

Inflation

10.17 The provision for pay awards in the guidelines was reduced in September 2006 to 2.25% (and to 2% in the medium-term financial plan) in line with the Chancellor's announcement to drive down the costs of public sector pay awards. However since September inflation has increased again based on December figures:

· retail price inflation 4.4%

· consumer price inflation, all services 3.8%

· consumer price inflation, all items 3.0%

· pay settlements - over 3%

10.18 There is risk therefore that pay awards will be nearer 3% than 2%. An extra 0.5% on pay would cost £1.5m. There would be less scope to make in year savings for higher awards because of the level of staff savings already targeted in the 2007/08 budgets, so some additional cover in balances is required.

10.19 Price inflation is provided for at 2.5%, and other budgets will also be under strain. An extra 0.5% here is equivalent to about £2.5m on purchased goods and services.

10.20 Interest rates are also on an upward trend and the budget assumes that they will average 5.5% during 2007/08. Any further escalation will add a further risk (0.5% increase in interest rate is £0.6m).

Demand-led budgets

10.21 Purchased care services for Children's Services and Adult Services, plus other demand led budgets, total around £230m. Whilst estimates have been made based on current commitments, known increases and past trends, there is always volatility in predicting future demand. A 0.5% variation on these budgets is just over £1m.

Capital receipts

10.22 The financing of the capital programme is based upon estimated capital receipts of around £60m being received in 2007/08. If there is any slippage in the timing or value of these receipts, then further temporary borrowing will be required in 2007/08. The risks of a shortfall on such an ambitious target are significant.

Savings

10.23 The total cash savings now included in the 2007/08 budget are £21.4m. Plans are in place to achieve these savings and progress will be closely monitored. It is expected that the savings will be achieved in a full year but there may be some slippage during 2007/08. In particular the total target of £14.4m for adult services remains stretching, and it includes £9.3m from the two year recovery plan started in 2006/07. Given overspends of £11m in each of 2005/06 and 2006/07, additional balances are necessary to cover the risk of any shortfall in 2007/08.

Other risks

10.24 Other risks remain which would normally be met from within the underlying level of balances, and include:

· winter maintenance

· insurance

· exceeding the VAT partial exemption limit

Risk Management

10.25 The detailed risk assessment (Appendix 13) indicates potential risks of around £29m in 2007/08. Not all of these risks will occur at the same time, but it would be prudent to set aside total balances of around £14m (50% of potential risks) especially for:

· pay and price inflation

· slippage on planned savings and capital receipts

· volatility in demand led budgets

10.26 The proposals in this budget report would result in balances of £14.4m for 2007/08. This is around twice as much as the minimum level of balances used by the County Council when there was less volatility and lower savings targets built into the budget. However to put it into context, £14.4m is about 0.9% of gross expenditure or 2.4% of the budget requirement. These figures are still relatively low, even with the higher assessed risks, than other local authorities.

10.27 Balances at or around this level will be sufficiently robust for the County Treasurer's assurance required by Section 25 of the Act.

11 Earmarked reserves

Schools reserve (£32.6m)

11.1 The single largest reserve remains the schools reserve, at £32.6m for 2007/08. However in addition £5m of school balances have been used under the School Balances Loan Scheme to finance Education capital expenditure, so that the underlying level of reserves is £37.6m. This can only be used in the longer term by schools.

Grant equalisation/CSR07 reserve (£26.1m)

11.2 The grant equalisation reserve will increase marginally from £24.9m to £26.15m in 2007/08 because of the remaining budgeted contribution to the reserve, after £7.5m was diverted to the job evaluation transitional costs reserve. The budgeted contribution, and the one-off balances on the reserve, will be available to be used over the three year CSR07 period as explained earlier in the report to help absorb potential further grant loss, or cuts in services that will otherwise be necessary. It is proposed therefore to add CSR07 to the title and purpose of this earmarked reserve.

Job evaluation transitional costs reserve (£17m)

11.3 The purpose and size of this reserve has been set out earlier in the report. The projected balance of this reserve, after costs included in the budget for 2007/08, will fall from £17.6m to £17m. Only time will tell if the amount is sufficient to meet equal pay claims, but it, together with the grant equalisation/CSR07 reserve, can be reviewed as part of the medium-term plan process in September 2007 (after CSR07 has been published and progress on equal pay claims might be a little clearer).

Landfill allowances (£4.3m)

11.4 This reserve was £3.5m at 1 April 2006, was reduced during 2006/07 to £2.8m and is projected to increase again to £4.3m by the end of 2007/08. It has been set aside to offset further council tax rises, bearing in mind past investment in waste infrastructure, and to finance future waste infrastructure to ensure that all recycling and landfill targets are met.

Insurance (£3.2m)

11.5 The insurance reserve of £3.2m should be adequate given present claims experience, but it is much lower than the £7.3m held at 1 April 2006 when there were a number of outstanding claims for fire damage to schools.

Capital reserve (nil)

11.6 This was budgeted at £6.5m at 31 March 2007, but will now be fully utilised because of the shortfall of capital financing resources in 2006/07. It is not planned to make further contributions to the reserve at this stage.

Invest to save reserves (£0.9m)

11.7 The former modernisation, restructuring and efficiency reserve was expected to be £3.4m when the 2006/07 budget was set. However £3m of this was used in July to build up balances to cover the projected overspend on Adult Services in 2006/07. The remaining £0.4m was used to facilitate restructuring in Children's Services and Adult Services as intended. A small balance of £0.2m remains on the invest to save reserve.

11.8 However this does not provide sufficiency flexibility for the future to help modernise, transform and restructure services in advance of CSR07. Whilst pressures on Adult Services and Children's Services are planned to be absorbed in 2007/08, there are indications that these cannot easily be dealt with in 2008/09 for Children's Services (because additional financing sources from use of grant etc have largely been used to balance the budget in 2007/08 rather than reductions in spending).

11.9 It is therefore proposed to add a budgeted contribution of £0.7m from the balance of the additional tax base increase to a new invest to save/value for money reserve, ring-fenced for improvements to Adult Services and Children's Services which will transform service provision and improve value for money from 2008/09 onwards. Business cases for investment will be required and will be approved by the Executive Member, Policy and Resources, on the advice of the Chief Executive and County Treasurer.

11.10 It is intended that such business process improvements would cover: children and families, improving fostering opportunities and outcomes for children looked after, and working with health to reduce the overall cost of care. Similarly on Adult Services the investment would be targeted at extra care housing, working on the innovation project to protect very vulnerable groups, working with the health interface, shifting resources to preventative care and reducing the unit costs of complex care packages for adults with learning disabilities.

Summary of earmarked reserves

11.11 Full details of the main categories of reserve showing movements from the actual amount at 1 April 2007, to estimated amounts at 31 March 2008, 2009, and 2010 are shown in Appendix 10. A comparison between budgeted reserves between 31 March 2006 to 31 March 2008 is shown in the next table.

Table 19: Summary of earmarked reserves

(1) Capital reserve was budgeted to be £6.5m in 2006/07 but now utilised fully in financing 2006/07 capital payments.

(2) £1.6m is projected to be withdrawn from services to schools business units.

11.12 Overall there is a reduction in earmarked reserves despite the substantive, and increased risks compared with a year ago around job evaluation/equal pay claims and the anticipated grant loss, tighter capping and efficiency target regimes likely with CSR07.

12 Balances

12.1 The trend in balances from the budgeted position in 2006/07 to the projected level of balances for 31 March 2008 (assuming at this stage no use in 2007/08, but available to cover the risks set out in the report) are

Table 20: Movement in balances

12.2 This results in balances at the recommended level, with the longer term objective of reducing back to £7.5m when specific risks identified from inflation, and slippage in savings plans or banking of capital receipt projections are reduced. Balances are broadly 2.4%, compared with 1.9% budgeted for 2006/07, but utilised and reduced to just 0.6% at 1 April 2006.

13 2007/08 overall budget proposals

13.1 Taking all these changes into account, the final budget proposals for 2007/08 compared with 2006/07 are

Table 21: Service cash limits 2007/08

13.2 Other budgets compared with 2006/07 can be summarised as follows

Table 22: Other budgets 2007/08

13.3 The main changes between years are:

· 6% increase in revenue contributions from SAP benefit realisation savings repaid to finance the capital programme and inflation

· contingency, pay and benefits costs in 2007/08 and temporary holding of resources for Hampshire Action Teams

· contribution to earmarked reserves, net withdrawal following implementation of job evaluation from 1 April 2007

· contribution to balances, as set out in report

· capital financing - a 14% increase because of borrowing costs on supported borrowing in 2006/07 which were not met in the formula grant settlement, together with additional costs from unsupported borrowing and higher interest rates (reductions have been made from 2007/08 to match this anomaly while representations continue to be made to Government to provide grant support towards borrowing costs of the capital allocations from 2008/09 onwards)

13.4 The total contingency of £15.0m includes

Table 23: 2007/08 contingency

13.5 Bringing all these budgets together results in an overall budget requirement of £598.2m which is a 5.4% increase on the adjusted budget base for 2006/07 of £567.5m

Table 24: 2007/08 budget requirement

13.6 The budget requirement will be met as shown in the next table

Table 25: 2007/08 precept my by council tax payers

13.7 It is anticipated that the overall council tax bill for 2007/08 will increase by about 4.7% (assuming an average district council tax rise of say 3.3%) as follows

Table 26: Provisional council tax bill 2007/08

13.8 The trends in spending plans (formula spending shares until 2005/06, overall Government grant from 2006/07), budgets and council tax are as follows:

Table 27: Percentage increases in council tax compared with spending plans, grant and budget

13.9 The council tax rise remains at 4.9% - the option reluctantly preferred in the budget consultation meetings (with the exception of IsItFair) and the community workshop run by MORI to avoid further cuts in services. It was also the amount set within the budget guidelines in December 2006.

13.10 Provisional comparisons with other County Councils suggest that Hampshire County Council

· has the second lowest formula grant per head in 2007/08 (after floor damping)

· the lowest relative needs grant per head

· council tax which remains below average and at or within the lowest quartile target

· council tax rise in line with most counties which appear close to the 5% capping limit, but some counties not at the grant floor, will have lower rises in 2007/08

· reductions in spending to keep within the capping limit as much if not more than most counties

14 2008/09 to 2009/10 medium-term financial plan

14.1 This follows the guidelines set in September 2006. Council tax rises are set at the current capping limit of 5%, and determines the cash limits available. Priority has been given to Adult Services, the waste contract and Children's Services to reflect demographic and cost pressures. Other services remain at base budget level, with a contribution towards the additional resources allocated to Adult Services.

14.2 Full year effects of savings and growth, variations in reserves and use of balances are built into the plan.

14.3 There is some flexibility built into the plan with unallocated amounts of £4.6m in 2008/09 and £5.2m in 2009/10 which may be required for the demand led services. These contingencies will be required to cover:

· service pressures and priorities

· any reinstatement of supported borrowing

· higher inflation or interest rates

· lower grant increase

· reduction in council tax capping limit below 5%

· higher unsupported borrowing from slippage in capital receipts

· higher balances to cover the above and other risks

14.4 The plan will be reviewed after CSR07 is published in summer 2007, including the planned use of the grant equalisation/CSR07 reserve to match spending and resources over the new three year period (2010/11 will be added).

Financial planning framework

14.5 The Annex to Appendix 9 contains the County Council's current financial management policies which form the framework for the current medium term financial plan and for the revision to the three year medium-term financial plan in September 2007.

Past trends

14.6 As well as looking forward, it is possible to update the past trends in Government grant nationally, and for the County Council compared with the Council's budget and council tax, and these are set out in Appendix 14.

15 Treasury management strategy and investment strategy for 2007/08

15.1 The County Council is required to adopt a treasury management strategy and an annual investment strategy for 2007/08 and these are set out in Appendix 11 for approval. The Appendix summarises:

· the strategy for the management of the long-term debt portfolio relative to forecast trends in long and short term interest rates, including the opportunity for debt restructuring

· the arrangements for the investment of surplus cash funds during the year

· the investment strategy for submission to the County Council for approval, conforming with the prudential code for financial management

16 Prudential indicators

16.1 The prudential code ensures that:

· capital programmes are affordable in revenue terms

· external borrowing and other long-term liabilities are within prudent and sustainable levels

· treasury management decisions are taken in line with professional good practice

16.2 Appendix 12 contains the prudential indicators required by the code for the County Council. The summary of prudential indicators in the Annex to Appendix 12 will be submitted for approval by the full Council in setting the budget.

16.3 Appendices to the report are:

1 Final local government finance settlement 2007/08 (Blue)

2 Revised estimates 2006/07 (Salmon)

3 Base budget 2007/08 (Pink)

4 Proposals for additional spending pressures and redeployment of resources in 2007/08 and 2008/09 (Yellow)

5 Efficiency improvements in 2006/07 to 2009/10 (Blue)

6 Review of income 2007/08 (White)

7 Budget 2007/08 - detailed analysis (Green)

8 Workforce statement and summary of workforce budgets (Blue)

9 Medium-term financial plan 2008/09 to 2009/10 (Pink)

10 Summary of reserves and balances 2007/08 to 2009/10 (Green)

11 Treasury management and annual investment strategies for 2007/08 (Yellow)

12 Prudential indicators (Blue)

13 Treasurer's report on risks, reserves and balances (Section 25 of the Local Government Act 2003) (Pink)

14 Past trends (Salmon)

Recommendations

Are contained in the 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.

None