Appendix 1

Section 25 report, Local Government Act 2003

1. Section 25 of the Act 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

2. 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 made available to the County Council in making its final decision.

3. The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. This puts emphasis on the medium-term budget strategy. This is set out in Appendix 9 of the Cabinet report where the forward budget plan is put in the context of the financial management policy agreed by the County Council. Though a three-year view has been taken in the medium-term financial plan, no Government spending plans are available beyond 2007/08.

4. A risk assessment has been made of the cost and demand pressures on budgets, insurance liabilities, achievement of budget savings, adverse winter conditions and achievement of capital receipts, which supports the proposed level of balances of 14.4m. This assessment is set out as an Annex to the Appendix.

5. Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 10 of the Cabinet report. Schools have the single biggest reserve at £38m within their delegated budget and ring-fenced specific grant. The most important reserves for other services in terms of the three-year view are the grant equalisation reserve (used to help match grant loss) and the job evaluation transitional costs reserve.

6. Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. However as the budget report makes clear, it is the greater uncertainties in the three year period following the 2007 Spending Review that also inform the need for reserves and balances during 2007/08, together with the impact of pay and benefits, greater risks of overspend from tight savings targets and demand led spending pressures in 2007/08, potential higher inflation and slippage in the achievement of capital receipts.

7. The budget report is the conclusion of a detailed process of prior consultation and consideration through out the current year by Cabinet.

8. The County Council's policy on balances is to hold a minimum prudent level, which on the basis of previous risk assessment has been less than 2% of the budget. This is relatively low but is sustainable given past experience provided that other elements of the financial management policy are maintained, particularly sound budget monitoring and budgetary control, and no supplementary estimates, so that spending variations are contained as far as possible within the year. However in 2007/08 there are greater risks because of higher savings targets, greater uncertainty about inflation, and about the scope to contain demand pressures, particularly on adult social care. The risks associated with the financing of the capital programme are also greater. For these reasons a level of balances equivalent to 2.4% of the budget is proposed in 2007/08.

9. The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the performance and risk management and earmarked reserves paragraphs in the budget report.

10. In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework, which covers these issues. The forward budget plan and reserves take into account the main risks and uncertainties, including:

· Inflation

- pay awards have yet to be agreed and an assumed increase of 2.25%, though consistent with Government policy of lower public sector pay awards, is significantly below the current rate of inflation

- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (eg in purchase of social care) where higher prices are likely in 2007/08

- short-term interest rates have been budgeted to average 5.5%, allowing for a further increase 0.25% before the beginning of the financial year

· Pay drift

- increments are not budgeted for and services will need to secure efficiency savings of £1.9m to offset these. Past trends suggest that this will be managed, though the requirement to achieve savings towards 25% of the increased costs of Pay and Benefits makes this more challenging

- there is a substantial potential liability from the implementation of the pay and benefits review. The budget provides for estimated continuing costs of £10m - £7.5 from a specific pay contingency and £2.5m from a benefits realisation plan, of which £2m has been budgeted in 2007/08 and the remaining £0.5m in 2008/09. £17m has been set aside for equal pay claims; a settlement in excess of this figure will require a capitalisation directive or the phasing of costs over more than one financial year in order to avoid compensating job or service cuts. The Government has taken steps to assist local authorities to spread these costs for council tax setting purposes by introducing draft regulations relating to the accrual of liabilities.

· Expected increases in employers' contributions following the actuarial valuation at 31 March 2004 have been built into the 2007/08 budget. The medium-term financial plan makes no specific allowances for further increases in employer contributions following the 2007 actuarial review

· Additional spending, savings and redeployments build in to the budget

- these are subject to planned review by Executive Members, and savings plans will need to be approved and monitored during the course of the year

· Efficiency savings and other savings

- there is a good track record covering the process of setting and achieving savings, but the target is difficult in 2007/08 and larger balances are recommended to cover the risks particularly of delay in achieving the Adult Services financial recovery plan

· Income

- there is an annual review to maximise income and increase income at least in line with costs which is included in the budget report

· Achievement of budget plan

- well established and sound history of very close achievement of outturn to budgets, despite the larger overspending on Adult Services than predicted in 2005/06

· Strength of financial information and reporting arrangements

- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year. Corporate co-ordination of budget monitoring has been strengthened in 2006/07

- other action plans will be put in place to consolidate and improve on the ratings within the Audit Commission's appraisal of use of resources

· Capital programme

- capital strategy, asset management plans and the local transport plan have all previously been accredited with the highest scores in the comprehensive performance assessment

- the impact of ambitious capital receipt targets is putting a strain on the financing of the capital programme and a further temporary shortfall of capital financing resources is forecast in 2007/08 to be covered by unsupported borrowing. A review of the professional fees charged to projects and of the resources required to support the programme of capital receipts was carried out in the summer of 2006

- the policy on Government borrowing approvals has been reviewed from 2007/08 onwards, because as a council at the grant floor, additional `supported borrowing' is not being matched by increased revenue support grant. Restricting the take-up of supported borrowing to a level which will limit the increase in the capital financing requirement relating to supported borrowing to 2.5% will have an impact in containing increased capital financing costs from 2008/09

· Level of borrowing and outstanding debt

- the issues are fully covered in treasury management strategy and prudential indicators appendices to the Cabinet report.

- the policy on temporary unsupported borrowing was revised in 2006/07 and will result in the financing costs being contained within the forward budget plan cash limits without an additional impact on the council tax payer

- the capital financing requirement is expected to peak in 2008/09 and thereafter on the basis of current capital programmes increase more slowly than in recent years

· Contingent liabilities

- the County Council self-insures, so it finances all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims and a reserve is maintained to deal with fluctuations in liabilities and in the level of fire damage reinstatement

· Statement on internal control

- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned

- the review of the effectiveness of the system of internal financial control is informed by the work of the managers within the County Council, by internal audit and the Audit Commission in its annual governance report and other reports.

- the Governance Committee receives and reviews the statement on internal control and the external audit governance report

· Audit Commission

- gave an unqualified opinion on the 2005/06 accounts.

- Provided a score of 3 out of 4 on the new harder test for use of resources and an action plan is being developed to sustain and improve this assessment

· Other risks

- there are potential legal claims outstanding and other possible risks that past trends suggest can be met from balances if required. There is no known significant risk or liability which requires a provision, contingency or reserve not already allowed for in the budget report

- changes in function and funding arrangements. These vary from year to year and the most significant change in 2007/08 is the initial phase of the establishment of a contact centre, `Hantsdirect' for call handling services, which will require some reorganisation of services within the relinquishing departments

- grant loss of £38m is projected after 2007/08. A change in the relationship between grant and council tax between different types of local authority could also adversely affect the County Council. Reserves need to be adequate to protect against potential volatility in the future

11. Provided that the County Council considers the above factors and accepts the budget recommendations, including the level of earmarked reserves and balances, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.

Jon Pittam, County Treasurer

2 February 2007