Contact: Nick Gibbins, (01962) 847544; [email protected]

1 Introduction

1.1 Attached as an appendix to this report is a Medium Term Financial Strategy, for approval by the Cabinet.

1.2 Previously the County Council's financial strategy for the medium term has been contained in a variety of documents though a number of them are linked on the Council's website, and are considered simultaneously as part of the budget and capital programme decision-making process. Production of a single document should enable the strategy to be more effectively integrated, to be communicated more clearly, as well as providing the opportunity for the strategy to become more comprehensive.

1.3 The Corporate Strategy and the Corporate Business Plan set the overall direction for the Medium Term Financial Strategy and the budget. This strategy is closely linked to the business plan to ensure that priorities are affordable and provide value for money, and that resources follow priorities. There is a two way relationship with the Corporate Business Plan and the business plan priorities are tempered by resource constraints as well as resources being linked to priorities in the business plan.

1.4 The attached strategy document incorporates the County Council's current financial strategy for the period 2007/08 to 2009/10. It reflects the grant allocations made by the Government in the second year of its two year grant settlement covering 2006/07 and 2007/08. The financial plan for 2008/09 and 2009/10 is based on assumptions about potential government grant levels and guidance on council tax capping going beyond the period covered by the 2004 spending review.

1.5 The medium term financial plan and other elements of the financial strategy when rolled forward to cover 2008/09 to 2010/11 will be constrained by the Comprehensive Spending Review 2007 (CSR 07), which has been delayed until the autumn. This is then expected to be followed by a three year grant settlement announced in December. This means that there is likely to be an extremely short period following the CSR 07 announcement to develop a three year budget plan for 2008/09 to 2010/11.

1.6 This report therefore also considers what further work on budget options can be progressed prior to the autumn to assist in developing a revised strategy for the next three year period. The report proposes as an initial step that Executive members should review budget pressures and savings options within the limits contained in the provisional budgets for 2008/09 and 2009/2010 to assist planning and budget consultation in the Autumn.

1.7 To assist planning Executive members and chief officers are also asked to review the activity level driving future budget forecasts, and to use benchmarking data from the Audit Commission profiles and other sources to establish value for money in linking their service plans to the corporate management plan and business plan.

1.8 Consultants have also been commissioned to conduct further benchmarking reviews to establish areas for fundamental service reviews towards the 3% cash efficiency savings targets which Cabinet will be able to consider in developing strategy further in September and for budget consultation.

2 Recommendations

· to approve the Medium Term Financial Strategy for 2007/08 to 2009/10

· to request Executive members to review the value for money benchmark activity and performance forecasts, budget pressures and savings options to contain spending within the limits set out within the provisional budgets for 2008/09 and 2009/2010

· to report back these reviews for consideration by Cabinet in September to assist planning and budget consultation during the autumn, before final budget limits are set in December after the formula grant announcement for the CSR07 period.

3 Basis of Medium Term Financial Strategy

3.1 The Medium Term Financial Strategy brings together the County Council's:

· three year budget plan, comprising the 2007/08 budget, and the provisional budget for 2008/09 and 2009/10

· the capital programme for 2007/08 to 2010/11, also included in the County Council's 2007/08 budget book

· a number of underpinning policy statements and strategies

- financial management policies

- value for money strategy and efficiency plan

- treasury management and investment strategies

- the Capital Strategy

- prudential indicators for capital finance

· a set of financial health indicators to monitor the strategy.

3.2 The strategy also highlights the links between the County Council's spending plans over the next three years with the corporate strategy and the joint plans agreed with the County Council's strategic partners. The corporate strategy includes within the corporate business plan an assessment of the resources associated with each of the activities within the plan, while Annex 1 of the attached strategy provides a reconciliation between the growth and redeployment proposals in the budget and the corporate strategy and financial management policies.

3.3 The strategy also includes a set of financial health indicators in Annex 5 drawn largely from existing plans and strategies, which will be the subject of regular monitoring.

4 Communicating the strategy

4.1 The approach to communicating the strategy to staff and stake holders is being developed with the Corporate Communications Unit. This will be relatively low key in relation to the current strategy, with a higher profile being given to the revised strategy for 2008/09 to 2010/11, which will be underpinned by what it is expected to be a very tight three year grant settlement.

5 Reviewing the strategy

5.1 The Chancellor of the Exchequer's budget announcement on 21 March 2007 confirmed that the announcement of the CSR 07 will be deferred until the autumn, but also as expected that increases in public spending from 2008/09 will be more constrained than in the previous four spending reviews. Allowing for the Government's assessment of economy wide inflation current spending on public services is planned to increase by 1.9% per annum over the next three year period, about half the average rate for the previous eight years. It has already been announced that Education spending will increase in real terms by 2.5%, and if the increase in NHS spending in real terms matches the 4.4% minimum increase recommended by the Wanless Review, there is unlikely to be any scope for real term increases in other areas of public spending, including local authority services funded by Council tax.

5.2 This interpretation is reinforced by the decision that the current annual efficiency target of 2.5%, of which 1.25% is required to be cashable, will be replaced by a 3% annual cash-releasing savings target from 2008/09, presumably the means by which the Government will be arguing that local authorities can meet additional demand for services and/or cost increases at above the general level of inflation.

5.3 The current medium term financial strategy anticipates a further squeeze on government grant increases by forecasting that Hampshire as a floor authority, will receive no increase in its government grant over the next two years, although it assumes that Council tax will continue to increase at 4.9% per annum. The growth and redeployment proposals for 2007/08 to 2009/10 reported to Cabinet in setting the 2007/08 budget require further work on the implications of complying with the provisional guidelines beyond 2007/08 both in terms of assessing future budget pressures more fully and in particular for Children's Services considering how more permanent savings can be identified to replace non-recurring savings identified in 2007/08.

5.4 It is clear from the Chancellor's recent budget that there are no grounds for anticipating a less restrictive financial climate for local authority spending than incorporated in the current medium term financial strategy. Consequently it is proposed that Executive members be requested to review budget pressures and saving options to contain spending within the limits contained within the provisional budgets for 2008/09 and 2009/10, prior to Cabinet giving further consideration to the budget strategy in September and the options to facilitate budget consultation in the Autumn.

6 Impact assessment

6.1 The medium term financial strategy draws upon existing documents prepared in accordance with the County Council's financial management policy. This policy applies equally to all services and ensures consistent financial management decisions across all services.

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.

Medium Term Financial Strategy 2007/08 - 2009/10

1 Introduction

1.1 The County Council's medium term financial strategy has previously been represented in a number of separate documents and this is the first document which sets out to incorporate all the elements of the County Council's financial strategy for the next three years.

1.2 The strategy incorporates

· the three year budget plan, comprising the 2007/08 budget and the provisional budget for 2008/09 and 2009/10

· the capital programme for 2007/08 to 2010/11, also included in the County Council's budget book

· a number of underpinning policy statements and strategies

- financial management policies

- value for money strategy and efficiency plan

- treasury management and investment strategies

- the capital strategy

- prudential indicators for capital finance

· a set of financial health indicators, which will form the basis for monitoring the strategy.

2 Links to the corporate strategy

2.1 The central purpose of the County Council's medium term financial strategy is to promote the achievement of the objectives of the corporate strategy, within the context of the County Council's financial management policies. The resource allocation decisions within the strategy, which are reflected in the three year budget plan and four year capital programme are based on the factors highlighted in the financial context to the corporate strategy, the outcomes contained in the corporate business plan and the financial management policies which determine the framework for the base budget, the starting point from which budget decisions are made.

2.2 The Corporate Strategy and the Corporate Business Plan set the overall direction for the Medium Term Financial Strategy and the budget. This strategy is closely linked to the business plan to ensure that priorities are affordable and provide value for money, and that resources follow priorities. There is a two way relationship with the corporate business plan and the business plan priorities are tempered by resource constraints as well as resources being linked to priorities in the business plan.

Financial context

2.3 The key elements to the financial context to the corporate strategy are:

· the County Council's grant entitlement under the current formula is well below the grant floor which results in only the minimum increase in Government grant

· budget pressures which are caused by significant demographic and legislative issues

- an aging population and an increasing number of young people with complex disabilities living into adulthood and adding progressively to the demand for care

- waste disposal costs continuing to rise at well above the level of inflation (6.5% estimated in 2007/08) as a result of national policies to reduce reliance on landfill by increasing taxes in order to make more expensive alternatives competitive with landfill

- increased numbers of vulnerable children required to be looked after by the County Council, despite a declining child population

· the impact of major change programmes underway in the County Council

- the development of a contact centre (Hantsdirect) to deliver improved and more efficient call handling across all services

- the Pay and Benefits programme to address equal pay issues and modernise the County Council's pay framework

· the continuing impact of financial pressures in adult services, resulting in spending £11m in excess of the budget in 2005/06, being tackled by means of a recovery plan designed to eliminate higher spending by the end of 2007/08, requiring a further £8m of savings from adult services in 2007/08. Other services were set targets to reduce their budgets by a total of £1.1m in 2007/08 and equivalent sums in 2008/09 and 2009/10, in order to redirect funding to this high priority service

· successful action being taken to address these spending pressures, with a strong focus on review programmes to find better ways of doing things, and an established value for money strategy, which has delivered annual efficiency improvements in excess of the Government's target of 2.5% per annum

Corporate business plan outcomes

2.4 The corporate business plan identifies the key actions and performance indicators which will deliver the priorities in the corporate strategy:

· Hampshire safer and more secure for all

· maximising well-being

· enhancing our quality of place

2.5 It defines the priorities by means of a series of outcomes and in addition includes a corporate management plan which focuses on the outcomes designed to ensure that the County Council remains a well-run organisation, associated with value for money, ensuring resources follow priorities and with developing capacity.

Financial management policies

2.6 Resource allocation decisions in the budget are also influenced by the financial management policies, which define the framework for setting the base budget, the starting point from which budget decisions are made. The policies are designed to encourage services to maximise their sources of income and to contain cost increases. Key policies in this respect relate to :

· the cash-limiting of budgets based on the inflation assumptions approved in the previous year's budget, requiring any excess inflation to be absorbed from savings elsewhere in the budget.

· the assumption that fees and charges for services will be increased in line with the cost increases relevant to that particular service

· allowing for service cash limits to be adjusted upwards or downwards to reflect changes in the level of specific grants.

2.7 Annex 1 contains a summary of the growth and redeployment proposals in the 2007/08 to 2009/10 three year budget plan, showing how these are linked to the financial context of the corporate strategy, to the outcomes of the corporate business plan and to the Council's financial management policies.

3 The national context

3.1 The County Council's medium term financial strategy is set within the context of national economic and public expenditure plans, national priorities influencing the distribution of Government grant between local authorities and national legislation defining the scope for the County Council to raise income from council tax and to borrow.

National economic and public expenditure plans

3.2 The three year period of the current strategy covers the final year of the Government's current spending plans for 2005/06 to 2007/08 agreed following the 2004 Spending Review, and the first two years of the period expected to be covered by CSR07. Though the Spending Review anticipated in 2006 on the basis of the previous two year cycle was deferred, the Chancellor of the Exchequer has in recent pre-budget and budget reports set much of the framework for CSR07.

3.3 The recent budget report in March 2007 set the overall envelope for increases in current spending over the CSR07 period for public spending as a whole, by announcing that current spending would increase on average by 1.9% per annual in real terms, compared with 2.5% in the 2004 Spending Review and 3.3% in the 2002 Spending Review. Some early CSR07 settlements have already been agreed including a commitment to increase Education spending by 2.5% per annum in real terms. A key decision which has still to be taken is the rate at which health spending will increase in real terms over the next three year period, given that over the last five years NHS funding has increased by an average 7.2% per annum in real terms. A lower rate of increase in NHS funding is anticipated from 2007/08, but the Wanless review recommends a minimum increase of 4.4% per annum in real terms beyond 2007/08 would be required to sustain improvements in health care.

3.4 Efficiency targets were established by the Gershon Review which set targets for efficiency improvements of at least 2.5% per annum across the public sector, of which at least half were to be cashable rather than non-cashable. These targets have now been significantly extended for the CSR07 period in the recent pre-budget and budget reports. The budget report set a target of at least 3% per annum, net of implementation costs, across central and local government, for what were described as cash releasing efficiency improvements, designed to enable resources to be released to improve front-line services and fund new priorities.

3.5 Decisions affecting formula grant and other specific grants payable to local authorities will not be taken until the CSR07 announcement in the autumn. However based on the public spending envelope already agreed, the early CSR07 announcements already made and other known Government policy priorities, it is unlikely that there will be much scope within the Government's spending plans for any increases in real terms in spending on other local authority services which are also funded by Council tax.

Local authority grant distribution

3.6 The challenge to the County Council in setting its medium term financial strategy is not solely in responding to a slow down in the rate of increase in the Government's plans for public spending. Successive reviews of the formula for distributing grant to local authorities in 2003/04 and 2006/07 have resulted in changes that redistribute grant away from county councils in the South East, including Hampshire. The changes in 2003/04 primarily affected the Education formula and the spending level at which resource equalisation occurs within the grant system. By 2006/07 the majority of Education spending, relating to schools, had been transferred to specific grant funding not based on a formula approach, but further changes to the remaining formula, particularly affecting Social Services, and to the spending level at which resource equalisation occurs, have had an even more significant and adverse impact on the County Council.

3.7 The changes introduced in 2006/07 to allocate formula grant to local authorities in the two year settlement for 2006/07 and 2007/08 were so redistributive that the damping arrangements provided by means of a grant floor affected a significant number of local authorities, not just a few adversely affected authorities. 17, or 50%, of all county councils had their formula grant determined by the grant floor in 2006/07. Because the damping arrangements were so wide spread the scaling back of grant increases for authorities above the floor level (to pay for the floor) were also substantial. For Education/Social Services authorities, the scaling factor was 84.5% in 2006/07 and 68.8% in 2007/08, clawing back the majority of those authorities' gains.

3.8 In addition to the primary damping mechanism in the two year grant settlement ensuring that all education and social services authorities had grant increases of at least 2% in 2006/07 and 2.7% in 2007/08, a secondary level of damping was introduced within the needs formula for social care. The introduction of a new form of presentation of the formula grant distribution in 2006/07, described as the four block model, no longer makes transparent in cash terms the Government's assumptions about spending needs and therefore the level of council tax increase required to support the increase in spending need. This has obscured the impact of the secondary damping within the social care formula, but the County Council's assessment of its position in 2007/08 is as follows:

3.9 £37.8m of Hampshire 2007/08 formula grant, equivalent to 30.8%, is therefore the result of transitional damping arrangements, rather than the operation of the grant distribution formula. Over the medium-term, if the current formula remain in place, the County Council can expect to lose over 30% of its current formula grant. The other effect of introducing a formula which requires such substantial damping is to undermine the role of formula grant in providing equalisation of changes in needs and resources. One effect of this in relation to needs affects the arrangements by which the formula grant allocation could formerly be argued to take account of changes in capital financing costs arising from Government decisions on supported borrowing, so that Government departments can no longer argue that local authorities are in a position to take up supported borrowing without it having any impact on local tax payers.

Council tax and borrowing

3.10 The Government abolished the practice of pre-announcing capping limits for local authority council tax as from 1999/00, the practice referred to as `crude and universal capping' but retained reserve powers in the 1999 Local Government Act both to cap the current year's council tax, requiring a rebilling, or to `nominate' the authority for possible capping in the following year. In recent years, though there has been no return to the formal pre-announcement of capping limits that were a feature of the pre-1999 system the Secretary of State has given fairly clear indications of his intention on the use of the reserve capping powers before local authorities have set their budgets. For 2007/08 the Minister of State for Local Government announced in November 2006 that the Government expected to see average council tax increases of less than 5% and would use the reserve capping powers to deal with excessive increases. In practical terms the effect is not very different from the pre-announcement of capping limits, with no county council setting a council tax increase at above 5% and very few significantly below it - 22 out of 34 county councils had council tax increases between 4.5% and 5%, with Hampshire's increase at 4.9%.

3.11 Part 1 of the Local Government Act 2003 introduced a new approach to the control of local authority borrowing to finance capital expenditure, replacing a system of Government borrowing approvals with the requirement to comply with a Code of Practice, the Prudential Code for Capital Finance in Local Authorities, designed to allow local authorities to determine their own capital investment plans, subject to them being affordable, prudent and sustainable. Government has continued to provide support through the grant system for implementing projects/programmes it has approved though this has been rendered ineffective by the extensive damping of formula grant since 2006/07. However local authorities are now able to incur additional unsupported borrowing subject to the requirements of the code and the County Council has established a policy on unsupported borrowing that has enabled the capital programme to be extended to support projects which will generate a financial return to the County Council either in the form of additional operating income or lower operational expenditure or in the form of capital income from land disposals and developer contributions.

4 Three year budget plan 2007/08 to 2009/10

4.1 The three year budget plan for 2007/08 to 2009/10 has been set within the context of the County Council's corporate strategy, outlined in Section 2 and of the national policies outlined in Section 3.

4.2 Though the Government's spending plans do not extend beyond 2007/08, assumptions have been made about grant increases in 2008/09 and 2009/10 and that the Government's policy will be to continue to use its capping powers to limit increases in council tax to 5% per annum. The resource assumptions underlying the budget guidelines for 2007/08 to 2009/10 agreed provisionally by the Cabinet in September 2006 and confirmed in December 2006 are as follows:

· that the increase in formula grant for floor authorities in 2008/09 and 2009/10 will be substantially lower than the 2.7% increase in 2007/08 and that a realistic assumption is that the County Council's formula grant will be unchanged in cash terms in 2008/09 and 2009/10 and that no increase in specific grants for non-schools services are likely

· that in view of the tight overall grant settlement the pressure on services highlighted in the corporate strategy, and the effect of the anticipated further redistribution of grant away from the County Council in 2008/09 and 2009/10, the County Council should plan on the basis that council taxes will increase by a level equivalent to the 2006/07 increase of 4.9% in 2008/09 and 2009/10, just below the level at which the Government might cap the council tax

· that the council tax base will continue to increase by an average 0.5% per annum and that annual collection fund surpluses will continue at an estimated £1.5m per annum.

4.3 Based on these resource assumptions, increases in the projected budget requirements for 2007/08 to 2009/10 are as follows:

	%
2007/08	5.4
2008/09	3.9
2009/10	4.4

4.4 The higher increase in 2007/08 and lower increase in 2008/09 than in 2009/10 reflects the impact of the council tax collection fund surplus, which was higher than forecast in 2007/08 at £4.2m but is forecast to decline to a more typical level at £1.5m pa from 2008/09.

4.5 Spending assumptions have been made as follows:

· pay increases at 2.25% in 2007/08, falling to 2% in 2008/09 and 2009/10, consistent with Government policy. The employers contribution to the local government pension scheme to increase to 17.7% in 2007/08, but to remain unchanged in the following two years. An average of 2.5% for non-pay inflation has been assumed broadly in line with the Government's forecast of.

· that the policy of not taking up supported borrowing in full, but instead limiting new borrowing to the level consistent with a 2.5% increase in the capital financing requirement, will be continued in 2008/09 and 2009/10, on the assumption that the Government may be unwilling either to allow for the `passporting' of increased borrowing costs in the calculation of the floor grant or to replace supported borrowing with capital grants

· that further pay and benefits realisation savings of £0.5m will be required in 2008/09, which have been targeted at adult services, as the cost of implementation is likely to be above average for this service.

4.6 Building on these resources and spending assumptions, the main elements of the budget strategy are:

· increases above inflation for adult and children's social care in recognition of demographic and legislative pressures and to support the safety and security of vulnerable members of the community. Increases of £8m in 2007/08, £6.5m in 2008/09 and £6.7m in 2009/10 for adult services are sufficient with no increases in specific grants to achieve a 4.3% annual increase in spending

· for all other service portfolios any new service developments and increased demand for services will have to be matched by efficiency savings or by redeploying resources from lower priority services.

· savings required from all other services to fund the additional resources for adult services - totalling £1.1m in 2007/08, £1.125m in 2008/09 and £1.150m in 2009/10

· a need to increase balances significantly in 2007/08 to around £14m based on an assessment of the risks within the budget, and provision of contingency sums of £4.6m in 2008/09 and £5.2m in 2009/10 in recognition of the potential for continuing higher risk budgets, associated with inflation levels, the ability to manage demographic and legislative pressures, the achievement of targeted levels of capital receipts, not taking up supported borrowing in full, the level of Government grant and the acceptability of further council tax increases at above the rate of inflation.

· The risk assessment of balance takes account of the financial management policies on earmarked reserves, as reflected in the protocol for earmarked reserves (policies 8 and 13), approved in February 2007. Earmarked reserves exist to deal at least in part, but only on a one-off basis, with the risks associated with equal pay claims and formula grant loss.

4.7 Annex 2 summarises the three year budget plan, which is based upon the increases in budget requirement analysed in the table below:

5 Capital Programme 2007/08 to 2010/11

5.1 The County Council approved a capital programme for 2007/08 to 2010/11 at its meeting in February 2007. The capital programme is integrated within the medium term financial strategy in a member of respects.

· it reflects the capital strategy approved by the Cabinet in July 2006 (see section 6.11 below), and the priorities of the corporate strategy

· the programme is drawn up in accordance with the capital programme policies included within the County Council's financial management policies

· decisions on the level of revenue contributions to capital and on the affordability of supported borrowing have been taken in conjunction with the decisions taken in agreeing the three year budget plan

· the use of unsupported borrowing is determined in conjunction with the setting of the prudential indicators, approved by the County Council in accordance with the prudential code of practice

· the treasury management strategy incorporates the strategy for making borrowing decisions.

5.2 Alongside decisions on the three year budget plan, guidelines for the preparation of the capital programme for 2007/08 to 2010/11 were provisionally set by the Cabinet in September 2006 and confirmed in December 2006. The guidelines comprise three elements:

· a locally resourced capital programme - supported by revenue contributions to capital, capital receipts and the non-transport and Education elements of the single capital pot. Guidelines were set based on the previously approved 2006/07 to 2009/10 programme adjusted for inflation

· a programme of projects supported by Government grants and scheme or programme specific supported borrowing allocations either allocated or forecast, subject to limits on the take up of supported borrowing allocations designed to restrict the increase in the capital financing requirement to 2.5% per annum

· The use of unsupported borrowing in accordance with the County Council's policy on prudential borrowing, which concentrates its use on supporting projects which yield a financial return and which are therefore self-sustaining in the medium and longer term. Unsupported borrowing is also used in the short-term to deal with any slippage which may arise in the generation of capital receipts to support the capital programme guidelines

5.3 Based on these three elements, the capital programme for 2007/08 to 2010/11 totalled £515.0m made up as follows:

	Locally resourced	Government approvals	Unsupported borrowing	Total
	£000	£000	£000	£000
2007/08	31,109	136,702	12,790	180,601
2008/09	26,459	81,528	5,434	113,421
2009/10	25,267	86,466	2,380	114,113
2010/11	24,876	76,179	5,845	106,900
	107,711	380,825	26,449	515,035

5.4 This programme comprises a mixture of start values, mainly for larger specific projects, and planned expenditure in the year, mainly for capital repairs and other block sum approvals. Annex 3 summarises the programme over services.

5.5 Capital expenditure in the year therefore differs from the level of the approved programme in the year because of the inclusion of expenditure incurred on projects which started in previous years and because not all expenditure relating to projects starting in the year will be incurred in the year in which the project starts. The table below analyses planned capital expenditure between 2007/08 and 2010/11, and the sources of financing.

	2007/08	2008/09	2009/10	2010/11	Total
Expenditure	£000	£000	£000	£000	£000
Projects started prior to 31 March 2007	66,500	33,700	6,600	500	107,300
Programmes starting after 1 April 2007	91,200	115,500	113,000	104,700	424,400
Expenditure on externally funded high way schemes, property related fees and land acquisition - not split between start years	29,800	25,800	25,300	25,100	106,000
	187,500	175,000	144,900	130,300	637,700
Financing
Borrowing	45,400	60,700	38,700	26,400	171,200
Capital receipts	44,100	23,300	11,300	15,000	93,700
Government grants	50,200	48,400	46,300	39,500	184,400
Contributions from other bodies	15,400	14,900	18,000	17,900	66,200
Contributions from reserves	3,000	400	-	-	3,400
Revenue contributions to capital	29,400	27,300	30,600	31,500	118,800
	187,500	175,000	144,900	130,300	637,700

6 Underpinning policy statements and strategies

Financial management policies

6.1 The County Council's financial management polices relating to financial planning are set out in Annex 4, covering overall financial planning and budget strategy, capital programme and value for money. These policies form the framework within which the three year budget plan and the capital programme are set, and within which the other policies and strategies included in this section are framed.

Value for money strategy

6.2 The value for money strategy develops further the financial management policies relating to value for money. It defines value for money in terms of achieving the optimum balance between economy, efficiency and effectiveness. It also explains how efficiency improvements as defined for Government efficiency planning purposes fits into value for money and the distinction between cashable efficiency improvements for efficiency planning purposes and cashable efficiency savings for budget strategy purposes. The strategy also defines how the County Council seeks to measure value for money, some of the approaches adopted to achieve value for money improvements and how value for money is built into the management process.

Efficiency plan

6.3 The efficiency plan forms the basis on which the County Council plans and monitors the efficiency improvements required to meet the targets set by the Government arising from the Gershon review, reflected in the value for money strategy and to achieve the efficiency savings included within the overall savings targets in the three year budget plan. The forward look Annual Efficiency Statement for 2007/08 was recently submitted to the Government, identifying planned improvements of £16m. If these improvements are achieved, in conjunction with planned improvements of £15.5m in 2006/07, improvements over the period 2005/06 to 2007/08 will amount to 10.6% compared with the 7.5% target.

Treasury management and annual investment strategies

6.4 These strategies provide the framework within which authority is delegated to the County Treasurer to make decisions on the management of the County Council's debt and the investment of the County Council's surplus funds. The County Council is authorised to borrow on a long-term basis to finance capital expenditure and short-term to deal with cash flow fluctuations pending the receipt of revenues.

6.5 The starting point for the development of the treasury management strategy for the period 2007/08 to 2009/10 is the assessment of changes in the long-term borrowing portion which is dictated by changes in the capital financing requirement, even though in the short-term the need to borrow may be offset by surplus funds derived from holding reserves and balances and from creditors exceeding debtors. The main determinants of the change in the capital financing requirement are:

· the level of new borrowing approved in setting the capital programme, taking into account new unsupported borrowing approved in accordance with the County Council's financial management policy and the repayment of any temporary unsupported borrowing

· the annual repayments charged to the revenue account or to external bodies in respect of transferred services, based on the requirement ot make a minimum revenue provision for the repayment of debt (normally 4%) within the revenue budget

6.6 The capital financing requirements for the period 2007/08 to 2009/10 is estimated as follows:

	2007/08	2008/09	2009/10
	£m	£m	£m
Capital financing requirement at 1 April	580.7	589.3	622.9
New borrowing net of repayments of temporary unsupported borrowing	32.3	57.4	7.2
Repayments charged to revenue account and external bodies	-23.7	-23.8	-25.1
Capital financing requirements at 31 March	589.3	622.9	605.0

6.7 The other key consideration in setting the treasury management strategy is the assessment of interest rate trends and the balance struck between the certainty and stability of longer term fixed rate borrowing and the flexibility of short-term borrowing at variable rates. Lender's option/borrower's option's loans (LOBOs) provide an opportunity for variable rate borrowing over longer term periods as an alternative component of the strategy.

6.8 The treasury management strategy for 2007/08 to 2009/10 set a target variable/fixed ratio of 55%/45%, including allowance of 15% within the variable rate proportion for LOBOs. Based on this ratio annual guideline targets of up to £16m and £9m were set for 2007/08 to 2009/10 for long-term fixed rate and LOBO's respectively, subject to interest rate conditions being appropriate. In considering whether contributions are appropriate for further long-term fixed borrowing, the strategy proposes a trigger rate of 4.5% at which rate and below further long-term borrowing would be considered, unless clear signs of a rising trend in rates occur, in which case it might also be appropriate to borrow at higher rates. Raising new LOBOs would be considered in circumstances when their primary rates and indicative rates for their remaining periods are no higher than the 4.5% trigger rate used for fixed-rate long term borrowing.

6.9 The strategy also authorised the County Treasurer to consider the scope for restructuring of long term loans in view of the changes in regulations for accounting for the amortisation of premiums incurred from debt restructuring, for the purposes of setting council tax. Due regard would be paid to the need to avoid a heavily skewed maturity profile as a result of any restructuring.

6.10 The County Council's investment strategy treats security and liquidity as paramount in investing surplus funds and such funds are invested solely in what are defined by the Government as `specified investments'. Surplus funds are invested in:

· fixed term deposits for periods up to 1 year with local authorities, the Government's Debt Management Office, or banks and building societies rated at least A2 by Moody's, a credit rating agency.

· call deposits with the Bank of Scotland (rated AA2), and three managed AAA - rated money market funds.

The lending list is reviewed monthly using Moody's ratings, and limits are placed on the levels of total deposits made with individual institutions. An overall review of the lending list and the investment limits is undertaken annually, subject to the approval of the County Treasurer.

Capital strategy

6.11 The capital strategy 2006 was approved by the Cabinet in July 2006 and brings together the Council's key policies for managing all its capital assets, including land, buildings and roads. Together with the appropriate financial management policies it provides the strategic framework for the preparation of the capital programme. Among the key policies in the 2006 strategy are:

· to focus attention on the most effective and efficient use of the Council's capital assets

· to link directly to the Council's corporate strategy, to the Hampshire Community Strategy and to the priorities in the Hampshire Local Area Agreement

· to improve the management and use of capital assets alongside the Council's policy and service objectives

· to develop a procurement strategy and to create long-term relationships to ensure value for money and continuous improvement

Prudential indicators

6.12 The Prudential Code for Capital Finance incorporates a series of indicators requiring annual approval by the County Council, designed to ensure that:

· capital programmes are affordable

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

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

6.13 The key indicators are incorporated within the financial health indicators discussed in Section 7 of this strategy. The single most important indicator is the capital financing requirement, and in particular the component within it relating to unsupported borrowing, as this is the most important measure of the affordability of the capital programme and of the prudence and sustainability of borrowing levels. The Council's policy on the use of unsupported borrowing is set out in financial management policy 29 (as set out in Annex 4).

7 Financial Health indicators

7.1 Annex 5 sets out a series of financial health indicators which it is proposed should provide the basis for the regular monitoring of the strategy. These cover budget variances, the management of the capital programme, the prudential indicators and income collection.

7.2

Service proposals for growth and redeployment 2007/08 to 2009/2010 - links to corporate strategy and financial management policy

Key

1 Corporate business plan outcomes

Hampshire safer and more secure for all

1.2 The users of Hampshire's roads are safer.

Maximising Wellbeing

2.1 Vulnerable adult and older people are treated in a way which maximises wellbeing, independence and inclusion.

2.2 Right care in the right place at the right time for adults and older people.

2.3 All children and young people enjoy learning and achieved to their full potential.

2.5 People have fair and equal access to services and information.

Enhancing our quality of place

3.5 The County Council owned and managed estate and heritage assets benefit Hampshire's quality of place.

Corporate Management Plan

1 Council services offer value for money.

2 Resources follow priorities.

2 Financial management policies

14. In order to allow services to operate within firm cash limits, allocate provision for inflation to services at the start of the financial year and require excess inflation to be absorbed.

19. Encourage service chief officers to submit applications for specific grants/partnership funding designed to maximise the resources available to the County Council, by allowing capital and revenue cash limits to be adjusted to reflect changes in grant levels.

20. Require services to review the level of fees and charges at least annually and set budget limits on the assumption that the level of charge will be increased in line with assumed inflation on gross expenditure.

7.3

Three year budget plan 2007/08 - 2009/10

¹ Makes no assumption about increased schools grants beyond 2007/08

2007/08 to 2010/11 Captial Programme

Financial Management Policies 2007/08 to 2009/10

Financial Health Indicators

*Income collection indicators are currently under review