Archived decisions

Contacts: Ejner Knudsen, Assistant Treasurer, 01962 847403

David Howells, Director of Corporate Services 02380 644000 ext 203

1 Introduction

1.1 Further to the budget strategy approved by the Finance and General Purposes Committee on 14 November 2007, this report attempts to address the following issues:

· spending requirements for 2008/09 onwards

· the main financial risks faced by the Authority and whether any changes are necessary in the levels of reserves and provisions

· the priorities for capital investment

· the impact of the Government's Comprehensive Spending Review (CSR) 2007

· how the Government's expectations for efficiency savings might be met

· the level (or range) of council tax increase Members feel stakeholders should be consulted on.

2 Budget requirements

2.1 Potential budget requirements can be split into three main categories: base budget, unavoidable new costs and any proposed growth items.

2.2 The base budget represents the cost in 2008/09 of carrying forward the policies approved in the 2007/08 budget, updated for inflation and the full year effect of any changes. The main factors taken into account are:

· assumed pay award of 2.5% for firefighters and support staff

· assumed price inflation of 2.5% (but with the exception of certain expenditure items such as business rates and information and communications technology where inflation is known to be significantly higher)

· anticipated increases in the cost of employer's contributions for the local government pension scheme

· costs of financing the capital programme assuming a 5.75% interest rate

2.3 The base budget assumes revenue contributions to capital of £730,000 in 2008/09, largely arising from the Authority's preferred policy of purchasing vehicles from direct revenue as far as possible in order to minimise the impact of unsupported borrowing. Based on the recommended vehicle replacement programme, this would increase to £920,000 in 2009/10 and then reduce to £500,000 in 2010/11.

2.4 Overall, assumptions made for these factors would increase the base budget by 2.8% and brings the base budget to a total of £64,195,000. This equates to an estimated increase in council tax of 3.2%. Full details are set out in Appendix 1. Appendix 2 sets out the outline medium-term revenue base budget for 2008/09 - 2010/11.

Unavoidable costs

Equal pay audit

2.5 Progress on this project has continued during the year and is monitored by the Human Resources Committee. A provision of £300,000 has already been made in the base budget from 2007/08 and it is now anticipated this should cover the additional pressure on pay budgets. No separate provision has been made for any potential back pay claims.

Audit Commission fees

2.6 From information gleaned from the Audit Commission's consultation document on its draft work programme and scales of fees for 2008/09, it would seem that the Authority will face an increase in fees from £67,000 (in the current year) to £92,000 for 2008/09 (a £25,000 (37%) increase). This is as a result of the expanded audit input required into areas including the Value for Money element of the Use of Resources Assessment from 2008/09 and the requirement to audit the accounts which will have to be prepared in accordance with International Financial Reporting Standards. This increase can be accommodated within the council tax increase required for the base budget.

Other growth pressures

2.7 It was explained in the budget strategy report to the Finance and General Purpose Committee that it is most unlikely that all of the previously identified funding pressures could be accommodated. The following items represent only those considered to be of the highest priority by the Service Management Team.

2.8 Dependent on the Members' views on the proposed level of council tax increase, it is anticipated that substantial offsetting efficiency or other savings would need to be identified during the year in order to fund these items. It is currently estimated that a sum in the range £200,000 to £400,000 could be available to contribute to these items if an increase in council tax of between 3.9% to 4.4% respectively was eventually approved. It must be emphasised that without corresponding savings there would be no additional scope to contribute to these pressures if a council tax of 3.2% (base budget requirement) was set.

Cost of borrowing

2.9 The revenue effect of the proposed capital programme adds £39,000 in 2008/09 (rising to £646,000 by 2011/12). This represents the increased costs of borrowing and the statutory provision for debt repayment.

Integrated Risk Management Plan (IRMP)

2.10 As soon as the programme of consultation with stakeholders has been completed, and the feedback has been collated, the officers will prepare a revised set of proposals for the Authority's consideration. This will take fully into account the financial implications and their timing. The potential financial impact of implementing all of the proposals currently contained in the Plan is estimated to be in the range £340,000 to £504,000 in 2008/09 rising to £495,000 to £920,000 in 2010/11. These estimates include a sum of £200,000 in each of the three years to provide for the loss of specific Government grant for Home Fire Safety Visits (2007/08 marks the last year of this three year Government-funded initiative).

Additional Responsibility Allowances

2.11 The concept of Additional Responsibility Allowances (ARAs) formed part of the November 2003 national pay agreement for staff on to Grey Book Conditions of Service. ARAs provide fire and rescue authorities with the option to make financial payments to staff for responsibilities outside of those detailed within their respective role maps. Following a full consultation process, a total of 11 activities (involving about 650 staff) have been identified that would merit an ARA payment. The estimated cost of the proposals, if introduced, would have an annual cost of £180,000. The Human Resources Committee approved the payment of these allowances subject to securing funding in the 2008/09 budget.

Workforce Strategy Management Information System

2.12 There has been a long-standing need to improve the quality of management information and the Workforce Strategy has reinforced this need. A number of options are being considered by a project team and it is estimated that development costs will be in the order of £350,000 with ongoing maintenance costs of about £30,000 per annum. Approval of a business case will be required in advance of any funds being identified or earmarked.

Exploiting investment in the new ICT network

2.13 The new network provides an opportunity to deliver greatly enhanced telephony services (Voice Over Internet Protocol or VOIP). The net cost of the initial hardware required to implement VOIP is estimated at £100,000. Ongoing maintenance costs would be completely offset by reductions in the costs of telephone line rentals. Consideration could be given to funding this project from the capital programme.

3 Level of reserves and general balance

General balance

3.1 Compared with the potential risks identified by the Authority when the £2m general balance was approved for the 2007/08 budget, some of these risks have eased. It is therefore reasonable to assume that the level of the general balance could be reduced for 2008/09. It is however too early in the budget cycle to carry out the exercise on comparative information from other fire authorities, but this should be available for Members in January or February.

Specific reserves

3.2 The Authority may also set up reserves for expected future spending which are more specific in nature and less dependent on risks. The current levels of specific reserves are:

· Transitional grant reserve - for repayment of transitional funding. The balance as at 31 March 2008 will be nil as the balance will have been used in 2007/08.

· Capital payments reserve - provision for capital payments. This was set up from a previous year's underspending in order to avoid borrowing in later years. The reserve was fully utilised in 2006/07. There will be a requirement for additional funding, possibly in 2008/09, for the redevelopment or relocation of Cosham Fire Station. A contribution to continue this reserve of £500,000 would seem appropriate.

· Modernisation reserve - to finance expenditure on modernisation issues if sufficient in-year savings cannot be identified. It is currently estimated that £269,000 will be used during 2007/08 leaving a balance of £345,000 at 31 March 2008. Given the financial pressures within the proposed IRMP a contribution of £255,000 to bring this reserve to an estimated balance of £600,000 at 1 April 2008 would seem reasonable. This would ensure that the good progress made so far can be continued, pending realisation of the efficiency plan savings.

4 Savings and efficiency measures

4.1 Members will wish to be sure that appropriate savings and efficiency measures are taken in order to:

· minimise the level of council tax

· deliver the savings required as part of CSR2007

· maximise the scope for redirecting resources to support proposals and other growth items arising from the Integrated Risk Management Plan.

4.2 The budget strategy approved by the Finance and General Purposes Committee included the proposal that 3% efficiency savings (approximately £1.8m in 2008/09) should be sought based on early analysis of the CSR announcement. It is now becoming clearer that the savings required by Fire Authorities could be lower at 1.7% (approximately £1m in 2008/09). It is therefore suggested that the efficiency plan is prioritised to deliver either level of these targets, pending confirmation of the assumption in the grant distribution.

4.3 The opportunity has been taken to identify efficiency gains that are expected to be delivered over the next three years. These can be summarised as follows:

Item	2008/09 £'000	2009/10 £'000	2010/11 £'000
Participation in the insurance mutual	75	75	75
Day crewing turnouts and allowances	153	191	195
Reduction in borrowing costs as a result of sales of housing stock	297	333	333
False Automatic Fire Alarms reduction policy (retained firefighters' pay)	70	70	70
Reprographics: improved contract	5	5	5
Firebuy: use of Ministry of Defence fixed telecommunications contract	18	18	18
Reduction in costs of administrative support (data input) for retained duty system	50	87	87
Potential reduction in costs of administrative support (through economies of scale associated with organisational restructuring) in Service Delivery	50	75	75
Middle Managers' Review: transfer from Grey to Green book grade	10	10	10
Total	728	864	868

4.4 Clearly these totals are some way off the savings required under CSR 2007 and work is continuing to identify the balance.

5 Capital Spending

5.1 The proposed capital programme for the three years 2008/09 to 2010/11 is set out in Appendix 3. This includes all existing commitments revised to reflect the latest estimate of costs for 2007/08 the details of which are set out below.

5.2 The Government has not yet announced the level of supported capital expenditure for 2008/09. It has been assumed at this stage that the same level of supported borrowing will be received in each of the next three years as in 2007/08 (£1,524,000).

Vehicles

5.3 The vehicles programme for 2008/09 to 2010/11 is as presented to the Finance and General Purposes Committee in October with the costs updated to 2008/09 outturn prices. Revenue contributions equivalent to £500,000 plus the capital costs incurred as a result of renegotiating certain leases as finance leases on the operational vehicles have been included for the three year period.

Asset Management - Buildings Maintenance

5.4 A Property Management Strategy is in preparation which is planned to be ready to present to Members at the next meeting of the Finance and General Purposes Committee. It is expected that this will identify a requirement to increase the financial provision for structural building repairs. A sum of £200,000 has been provisionally included in the proposed capital programme. This would bring the total annual capital provision to £450,000.

Capital Financing

5.5 Taking into account the recommendations outlined above it is proposed to finance the capital programme as follows:

	07/08 £'000	08/09 £'000	09/10 £'000	10/11 £'000	11/12 £'000
Payments - existing commitments	7,545	645	-	-	-
Payments - proposed programme -2008/09 - 2010/11 starts	-	4,546	3,684	2,619	990
Total payments	7,545	5,191	3,684	2,619	990
Financed by:
Supported borrowing	3,563	1,524	1,524	1,524	990
Unsupported borrowing	628	525	930	595	0
Revenue contributions	822	730	920	500	0
Capital contributions	18	0	0	0	0
Capital grant	292	0	0	0	0
Capital payments reserve	0	0	0	0	0
Capital receipts	2,222	2,412	310	0	0
Total financing	7,545	5,191	3,684	2,619	990
Supported/unsupported(-) borrowing:
Unused Balance 1 April	2,039	-628	-1,153	-2,083	-2,678
Assumed allocation	1,524	1,524	1,524	1,524	1,524
Used in year	-4,191	-2,049	-2,454	-2,119	-990
Balance 31 March	-628	-1,153	-2,083	-2,678	-2,144

5.6 The table above illustrates that the Authority is now placing a larger reliance on unsupported borrowing than in previous years.

6 Government grant

6.1 It is currently anticipated that the level of Government grant will be announced after this report is issued but before the date of the meeting. An update will be given to Members at the meeting.

6.2 The Government grant is also expected to be announced for years 2 and 3 of CSR 2007 (i.e. 2009/10 and 2010/11) as well as for 2008/09. It is currently anticipated that the 2^nd and 3^rd year will be tighter settlements than 2008/09. Caution must therefore be taken when setting the budget and associated council tax as to the implications any decisions may have on future years.

7 Council tax

7.1 The Government has reserve powers to cap authorities proposing council taxes which they consider excessive, and it has been confirmed that the Government expects council tax increases to average significantly less than 5%.

7.2 The Authority has in the past three years had the policy of aiming to keep the level of council tax increases at or below that of state pensions over a three year period. The table below shows the position to date and the resulting maximum increase in 2008/09 if the policy were to be continued:

	Council tax increase (%)	State pension increase (%)
2006/07	2.9	2.7
2007/08	4.5	3.6
2008/09	2.8	3.9
Average	3.4	3.4

7.3 To achieve a council tax increase of 2.8% would require approval of a budget equivalent to approximately £200,000 less than the base budget.

7.4 It was recognised by Members at the meeting of the Finance and General Purposes Committee that this policy may not be sustainable for the next three years of the medium term financial plan. The following table shows how the level of council tax might relate to increases in the level of state pension in future years (assuming pension increases in line with the Government's inflation assumptions):

	Council tax increase (%)	State pension increase (%)
2007/08	4.5	3.6
2008/09	2.8 (say)	3.9
2009/10	2.95	2.75
2010/11	3.65	2.75

7.5 It is currently estimated that each £1m increase in spending adds approximately £1.61 (2.9%) per year to the band D council tax.

7.6 Trends in the Authority's budget and council tax are as follows:

	Budget	Budget increase	Council tax at Band D	Council tax increase
	£m	%	£	%
2001/02	45.2	9.8	-	-
2002/03	48.9	8.0	-	-
2003/04	51.3	5.0	-	-
2004/05	58.4	13.8	51.30	-
2005/06	60.3	2.0	52.11	1.6
2006/07	59.6	2.9	53.64	2.9
2007/08	62.5	4.9	56.07	4.5
2008/09 base + unavoidable less £200,000	64.0	2.4	57.64	2.8
2008/09 - Base + unavoidable	64.2	2.8	57.87	3.2
2008/09 - Base + unavoidable + £200,000	64.4	3.0	58.26	3.9
2008/09 - Base + unavoidable + £400,000	64.6	3.4	58.54	4.4

8 Consultation options

8.1 Possible increases in council tax to be consulted on might include 2.8%, 3.9% and 4.4%.

Recommendations

(a) That the base budget be approved.

(b) That arrangements be made for statutory consultations on proposals consistent with a range of possible council tax increases depending on Members' views.

(d) That the final budget and council tax be set by the Authority at its meeting on 13 February 2008.

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:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

None

List of appendices

Appendix 1 - Calculation of base budget

Appendix 2 - Outline revenue budget 2008/09 - 2010/11 (green)

Appendix 3 - Existing capital commitments and proposed programme 2008/09 - 2010/11 (yellow)

Appendix 1

Calculation of the base budget

1 Summary of changes in the base budget

		£000	%
Original budget 2007/08 at estimated outturn prices		62,450
Add full year costs of actual inflation to November 2007		89	0.1
Add growth items allowed in the base budget:
	Net cost of increments	24	-
	Interest and statutory provision for debt repayment	574	0.9
	Full year effect of previous years' growth	-243	-0.4
	Provision for inflation from November 2007 to outturn 2008/09	1,359	2.2
	Retained incidents	-70	-0.1
	HFRA firefighter pension costs	107	0.2
	Net change in leasing costs	-95	-0.1
		64,195	2.8

2 Full year cost of inflation to November 2007 prices

2.1 The original budget has been increased by the actual costs of inflation to November 2007. Total inflation is £89,000 for pay and prices. This is particularly low as there are several budget heads (energy related) where the inflation applied is negative.

3 Increments

3.1 These are the gross costs of increments less savings on turnover. The net cost for firefighters is nil and for support staff is £24,000.

4 Interest and provision for statutory debt repayment costs

4.1 Interest payable to both the Public Works Loans Board and the County Council together with the amount that has to be set aside for the statutory provision for debt repayment increase by £574,000 in 2008/09. This is due to the increased borrowing (both long and short-term) resulting from the capital programme (the headquarters development in particular) and the reduction in reserves (such as capital payments) which the Authority previously held which would have attracted interest receipts.

5 Full year effect of previous years' growth

5.1 These decrease the budget by £243,000. This is mainly due to the one year growth included in the budget for the transitional costs relating to day crewing and home fire safety visits and the contribution to the general reserve offset by the falling out of the contribution from the transitional grant reserve.

6 Retained pay - number of incidents

6.1 The budget is currently based on 24,898 incidents. This was calculated using the agreed formula which takes the average of the last five years excluding the highest and lowest years to avoid any distortion of exceptional years.

6.2 The formula has been calculated for 2008/09 and the average number of incidents decreases to 24,198 which in turn decreases the retained pay budget by £70,000.

7 Provision for future inflation

7.1 The provision for inflation from November 2007 to March 2009 has been calculated based on 2.5% for firefighters and for support staff, 3.9% for pension payments that the Authority is still liable for and 2.5% for all other costs. An increase in local government employer's pension contributions of 1% has also been provided for.

8 HFRA firefighters pension costs

8.1 The pension costs for which the Authority is liable for are estimated to increase by £107,000 in 2008/09. This is mainly due to the ill-health payments which the Authority has to pay into the pension account which are payable in three annual instalments. The financial year 2008/09 will bear the cost of 1/3 of any such retirements in 2006/07, 2007/08 and 2008/09. The costs should level out now as they will reflect three "1/3rds".

9 Reduction in leasing costs

9.1 This is the reduction in costs in the year of the operational leasing charges falling out as leases expire offset by the additional revenue costs of finance leases taken out.

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