Contacts: Ejner Knudsen, Assistant Treasurer, 01962 847403

David Howells, Director of Corporate Services 02380 626835

1 Introduction

1.1 This report sets out changes to the financial projections for 2008/09 since the draft budget was presented to the Authority last month. Members will receive a presentation at the meeting covering the main issues and feedback emerging from the statutory budget consultation process.

2 Updated information

Provision for inflation

2.1 The increase in the employer's contributions associated with the Local Government Pension Scheme has been set by the actuary and will be 0.5% as opposed to the 1% originally included in the provision for inflation. The financial consequence of this reduces the provision for inflation by £47,000.

Interest on external loans

2.2 Further work has been undertaken and it is now expected that the interest rate on external loans based on current rates will be 0.25% lower than previously assumed (now 5.5%). This reduces the base budget by a further £10,000.

Billing authorities' taxbases and collection funds surpluses and deficits

2.3 More up-to-date information has now been received from the billing authorities on their estimated taxbases and surpluses or deficits on their collection funds. Most figures are still estimates and it is hoped that any further changes will not be significant. The position is overall more favourable for the Authority, with most billing authorities now estimating increases in their taxbases and overall a surplus position on their collection funds for 2008/09.

2.4 The estimated effect this will have on the budget is to increase the budget which can be afforded within any given council tax increase by approximately £225,000.

Summary of changes to the draft base budget and unavoidable costs

2.5 The changes to the draft base budget and unavoidable costs are:

	£'000
Draft base budget as presented to HFRA December 2007	64,195
Unavoidable costs - audit fees (unchanged)	25
Draft base budget and unavoidable costs as presented to HFRA December 2007	64,220
Decrease in provision for inflation	-47
Decrease in interest costs	-10
Updated draft base budget and unavoidable costs	64,163

2.6 This draft budget increase now stands at 2.7%, which would require an increase in council tax of 2.9%. Appendix 1 sets out the updated calculation of the base budget and Appendix 2 summarises the draft budget and unavoidable costs.

Projected outturn 2007/08 and modernisation reserve

2.7 The budget monitoring report (also on this agenda) identifies that there is likely to be a greater pressure on the modernisation reserve than anticipated. It is now estimated that the call on this reserve is likely to be £355,000. To increase this reserve to a balance of £600,000 would require a contribution of £341,000.

3 Efficiency plan

3.1 The Government's Comprehensive Spending Review (CSR07) requires this Authority to make cashable savings of £1,055,000 in each of the next three years. It is unrealistic to expect sufficient savings to have been identified - and confirmed as achievable - before the budget is finally set next month, particularly for 2009/10 and 2010/11. The scale of the savings required is such that some proposals would inevitably impact on the delivery of front-line services to the public and as such would require the Authority to consult with key stakeholders about them. Nevertheless, it would not be acceptable to set a council tax level without taking into account this required level of efficiency savings. The budget proposals therefore assume that efficiency savings will progressively be identified and used to offset funding pressures and growth items. Members need to be aware, however, that there are risks involved in setting a budget that relies on delivering such a significant element of savings.

3.2 The table below sets out the efficiency savings identified to date:

	2008/09	2009/10	2010/11
	£'000s	£'000s	£'000s
· IRMP: Relocation of resources from Copnor Fire Station (efficiency gain)	560
· Participation in mutual insurance arrangement	75
· Reduction in allowances associated with day-crewing duty system	153	38	4
· Reduction in rented accommodation associated with day-crewing duty system	26	12
· Sale of housing stock - savings in maintenance costs		25	25
· Human Resources Department restructuring	49
· Potential reduction in costs of administrative support (through economies of scale associated with organisational restructuring) in Service Delivery	50	25
· Retained Firefighter Management System - reduction in data input resources	50	37
· Ministry of Defence fixed telecommunications `Firebuy' contract	18
· Improved photocopier contract	5
· Middle Management Review (change from `Grey' to `Green' Book conditions)	10
· Business Rates Review (reductions achieved)	35
Potential efficiencies identified to date	1031	137	29
Value of efficiencies yet to be identified	24	918	1026
Total efficiencies to be achieved	1055	1055	1055

4 Budget pressures including growth proposals

4.1 No additional budget pressures are put forward beyond those identified in the draft budget report considered by the Authority in December.

4.2 The scope to fund these pressures will depend on the successful implementation of the efficiency plan. They are listed, in current priority order, as follows:

	2008/09 £'000s
· Cost of borrowing - the revenue effects of the proposed capital programme.	39
· Integrated Risk Management Plan (IRMP) - the cost of implementing all of the proposals in the current IRMP. The figures include £200,000 for Home Fire Safety Visits currently funded by Government grant. Estimated costs are in the range of £340,000 - £504,000 in 08/09 rising to £495,000 - £920,000 in 2010/11.	504
· Exploiting investment in the new ICT network - the business case has been prepared which demonstrates that the initial £100,000 investment can be recovered through savings of £30,000 pa in maintenance costs. This could be included in the efficiency plan if this growth item can be accommodated.	100
· Workforce Strategy Management Information System - estimated one-off development cost of £350,000 with ongoing maintenance costs of £30,000 pa from 2009/10 onwards to implement a new application. The business case will be presented to Human Resources and Finance & General Purposes Committees in April 2008.	350
· Additional Responsibility Allowances - part of the national pay framework for payments to staff for responsibilities additional to basic roles.	180

Capital spending

4.3 The proposed financing of the capital programme presented to Members in December has been updated to reflect the level of supported borrowing announced by the Government for the three years 2008/09 - 2010/11. The proposed funding and programme are set out as Appendices 3 and 4 respectively.

4.4 In considering the capital programme proposals Members will wish to take account of the Prudential Code for Capital Finance. The main objective of the Code is to provide a framework that will ensure and demonstrate that capital expenditure plans are affordable and that all external borrowing and other long-term liabilities are within prudent and sustainable levels. To achieve this, the Code uses a set of Prudential Indicators which relate to capital expenditure plans, external debt and treasury management.

4.5 Appendix 5 summarises the indicators which the Authority needs to set on an estimated basis in approving the budget and capital programme and which will then be subject to monitoring during the year and approval at the year end. In compiling these figures it has been assumed that the capital programme will be approved as set out in this report. In summary, the proposed programme can be judged to be prudent as defined by the requirements of the Code, however, it should be noted that the Authority's allocation of `Government-supported' borrowing will be exceeded substantially.

5 Level of general balance and specific reserves

General balance

5.1 The general reserve has been used in previous years to protect against the potential financial risks identified by the authority, and in particular those not covered by the creation of specific reserves, which effectively ring-fence the deployment for the purpose stated. The general balance is also subject to external scrutiny by auditors in assessing the financial health of authorities as part of the inspection process, therefore the Treasurer makes the final recommendation to be considered by the Authority at its budget meeting in February.

5.2 Several of the risks identified for 2007/08 have eased or been eliminated and details of the updated assessment for 2008/09 is set out in Appendix 6, which concludes that the total reserve can be reduced by £500,000 to a new level of £1.5m. It is hoped to have available at the budget meeting in February comparative information from similar authorities and any other information to help members in considering the recommendation but at this stage it is too early in the process to collect any meaningful data from them.

Specific reserves

5.3 The only change to report (as mentioned in section 2) is the expectation that there will be a greater call on the modernisation reserve in 2007/08. In order to maintain some continuity for modernisation issues in 2008/09 a £341,000 contribution would seem appropriate to restore the balance to £600,000.

5.4 There is no change to the suggested contribution of £500,000 to the capital payments reserve for the relocation or redevelopment or Cosham Fire Station.

5.5 No other increases or decreases in reserves are considered necessary for 2008/09.

5.6 Council tax

5.7 The levels of increase in council tax consulted on were as follows:

5.8 An oral report will be given to Members at the meeting on the feedback received at the various consultation meetings held on 15 January 2008.

5.9 Each £1m increase in spending adds £1.86 (3.3%) per annum to the Band D council tax; or, 1% on the council tax delivers approximately £300,000.

6 The future

6.1 The Government's Comprehensive Spending Review 2007 which set out its spending plans for the public sector, including the Fire and Rescue Service, delivered the expected tightening of finances through its proposed grant settlements. It is important for all authorities to prepare forward plans for the medium term (covering specifically the 3 years of the review from 2008/09) and ensure that financial plans are properly aligned with the corporate development plans (Integrated Risk Management Plans). In addition, the Government's spending targets and grant support have assumed the ability of the sector to deliver efficiency savings to bridge the accepted gap in financial terms between maintaining existing services, absorbing predicted inflation, and delivering new service demands.

6.2 It is already known that years 2 and 3 of the medium term plan period will be much tougher within grant increases even lower at 1.7% and 1.9% respectively. Internal procedures will need to be reviewed to ensure that changes to services and costs during the year are reflected accurately as far as their future impact is concerned, and that savings are identified early for capture into the efficiency plan for redeployment of funds towards growth or other budget pressure.

7 Treasury Management Strategy

7.1 The Authority is responsible for approving the annual Treasury Management Strategy this is attached as Appendix 7 for Members' consideration.

8 Response to Government on Revenue Support Grant Settlement

8.1 Attached for Members information (Appendix 8) is a copy of the Authority's response to the Government on the grant settlement for the three years 2008/09 to 2010/11.

9 Equality impact assessment

9.1 An impact assessment has been made on the proposals in the paper and shown that they are not discriminating. They are considered compatible with the Human Rights Act 1998 and the Race Relations (Amendment) Act 2000.

Recommendations

1 That the Committee recommend to the Authority its preferred level of budget and/or council tax for 2008/09 and any factors to which it would like to draw attention.

2 That the Authority be recommended to approve the Capital Programme and associated Prudential Indicators set out in Appendices 4 and 5 of this report.

3 That the Authority be recommended to approve the Treasury Management strategy as set out in Appendix 7 of this report.

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:

none

I:\Treasurers\Corporate Finance\Jane\Fire\Budget\Budget 2008 09\FGP Updated Budget 17 Jan 08.doc

Attached appendices:

1. Calculation of base budget

2. Draft revenue budget (green)

3. Financing of proposed capital programme

4. Proposed capital programme (yellow)

5. Prudential indicators summary

6. Level of specific reserves and general balance

7. Treasury Management Strategy

8. HFRA's response to the Revenue Support Grant for 2008/09, 2009/10 and 2010/11

Appendix 1

Calculation of the base budget

1 Summary of changes in the base budget

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 £564,000 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 0.5% 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.

Spare page for appendix 2 - draft budget

Appendix 3

Financing of existing capital commitments and proposed capital programme

Page for appendix 4 - proposed capital programme

Page for appendix 5 - prudential indicators

Appendix 6

Level of specific reserves and general balance 2008/09

1 Introduction

1.1 The Local Government Act 2003 requires that the Treasurer assess the financial risks faced by the Authority and makes recommendations based on this as to the appropriate levels of resources required to be held against these risks.

1.2 In considering financial risks, a distinction must be made between:

· A provision, which is made for a known and quantified outstanding liabilities. It is usual, for example, to hold some provision in the Authority's accounts in respect of specific known claims against the Authority, which are not covered by insurance.

· On the other hand, reserves are set up against the possibilities of future costs that are either not yet liable or capable of being quantified, e.g. the likelihood that there will be more uninsured claims in future.

2 Level of reserves required

2.1 The approach taken in this paper is to assess the risks of increased expenditure that the Authority faces during any given year. Some adjustment is then appropriate given that:

· there is a much smaller chance that all identified risks will occur in the same year; and,

· the use of reserves is not the only means of meeting such pressures. Savings/transfers from underspent budgets are preferable (and the Authority has a good recent record in achieving these), together with other assistance available through the flexible use of capital funding.

2.2 The main factors used to evaluate the primary financial risks facing the Authority, together with the suggested amounts required to cover them, are summarised in the following sections.

3 Pensions fluctuations

3.1 The new financial framework for pensions, which came into force on 1 April 2006, transferred most of the risks in association with pensions expenditure from Fire Authorities to the Government. There are still some risks associated with pensions relating in the main to the number of ill-health retirements but given that they are paid over a three year period a sum of £50,000 is considered sufficient.

4 Inflation risk: Pay

4.1 There may be a need during the year to meet the costs of a pay award not known at the time of setting the budget. The firefighters' pay award takes effect from July and it is not yet known. Non-uniformed staff pay is more likely to be known when setting the budget given an effective date of award of 1 April - although in 2007 the pay award was not agreed until October and the pay award for 2008 has not yet been agreed.

4.2 In the past a reserve equivalent to an additional 1.0% of firefighters' and support staff pay was made. Given that the base budget includes a provision for 2.5% for 2008 pay awards and the Government's recent approach to pay awards this need has been eliminated and no provision is proposed for 2008/09.

5 Uninsured risks

5.1 Although the Authority has insurance in place, there remain risks. There was a period when the Authority effectively became uninsured from April 1997 to June 2001 due to its primary insurer going into liquidation. There are also some uninsured risks, e.g. for employment practice issues; and, if there are higher than budgeted levels of insurance claims, then there will be higher excess costs to pay. In addition the arrangements under FRAML could call on the Authority for a further £260,000. This is one of the harder areas to assess, but based on the historic number of uninsured risks tending to come forward and the continuing trend towards more litigation, together with the new FRAML risk £800,000 is recommended.

6 Extremes of weather

6.1 Unusually hot dry summers, wet winters and storms can all lead to additional operational costs, primarily associated with increased activity by retained firefighters and vehicle running expenses including fuel. This is recognised under current arrangements through a protocol which builds in a budget variation for increases in the number of incidents. Historically, the highest variation was 16.5% in 2001/02, but this was exceptional. A lower provision of £250,000 would seem appropriate and no change is proposed to this figure.

7 Other inflation

7.1 There is some risk attached to non-pay inflation levels: for example, energy and fuel costs. To allow for a possible 10% increase in these heads over and above the budgeted level of inflation would require £70,000.

8 Regionalisation

8.1 No recognition of regionalisation is thought necessary in calculating the level of general balance for 2008/09. This will, however, be an area to keep under review.

9 Capital Programme issues

9.1 The Authority has a significant capital programme underway. The timing of payments and capital and to a certain extent overall project costs are difficult to estimate. It would make sense in taking the capital programme into account when considering the level of general balance to hold. It is difficult to rationalise a formula-based approach to this, but a sum of £500,000 would not appear unreasonable.

10 Uncertainties in 2008/09 and beyond

10.1 The Authority is facing changes - many of which the costs and timings are far from clear. This time last year these included IRMP, possible merger with the Isle of Wight, equal pay audit, take up of pension by retained firefighters, regional control issues, Firelink and a replacement secondary control room. Again it is difficult to rationalise a formula-based approach to this, a sum of £800,000 seemed appropriate last year. Many of these uncertainties have now gone and a sum of £400,000 would not appear unreasonable for the 2008/09 calculation.

11 Conclusion: level of reserves

11.1 Bringing all these factors together leads to a `maximum exposure' of £2,070,000 as set out in Table 1. However, as mentioned above, other funding sources may be available, and it is not likely that all these problems will occur in the same year. That is illustrated historically by the fact that the Authority's outturn position has very rarely resulted in an overspend, and recent years have produced underspends. In theory it would probably be reasonable to discount the level of reserves required by 50% for the improbability of simultaneous recurrence of problems. However, it is considered sensible to take a more cautious position so a reduction of only 25% is proposed: this can be revisited if the Authority's budget performance continues to be healthy. This would suggest that an appropriate level of reserve is £1,550,000. Given the imprecise nature of the assessment, it is reasonable to round this to £1.5m. Naturally, the level will be kept under review in light of both experience and variations in factors such as uninsurable risks and inflation rates.

11.2 This results in reserves at just over 2.3% of annual spend, which appears to be a somewhat lower proportion than for most other fire and rescue authorities.

11.3 This is a relevant background factor, though not a determinant of good practice as it may be for example that less strict control of budgets is in place in such authorities, and Hampshire should also gain through the `economy of scale' in spreading risks across a larger spending base than most. In addition this does not take account of how much risk is being carried in the revenue budget. Hampshire's budget is built on a realistic basis with prudent provision for future inflation being provided for.

Table 1: Summary of Factors

Factor	Assessed impact 2007/08 £000	Assessed impact 2008/09 £000
Pensions: payments	50	50
Inflation: pay	370	0
Uninsured risks	600	800
Extremes of weather	250	250
Inflation: other	40	70
Capital factors	500	500
Future years' uncertainties	800	400
	2,610	2,070
x 75%	1,958	1,550
Rounded £100,000	2,000	1,500

Accordingly, it is proposed the budget for 2008/09 should be built on the basis of providing for a £1.5m level of reserves.

Appendix 7

Treasury Management Strategy 2008/09

The Authority has to approve an annual Treasury Management Strategy. The strategy covers capital finance and debt, interest rates and borrowing strategy and the investment of surplus funds.

1 Capital finance and debt

Total capital expenditure in 2008/09 is estimated to be £5.2m which it is planned to finance through a combination of revenue contributions, borrowing, capital grant and capital receipts.

Since the Authority was established, 15 long-term fixed-rate loans totalling £5.95m have to date been taken from the Public Works Loan Board (PWLB).

1 Interest rates and borrowing strategy

The Authority borrows for two main reasons:

· To finance capital expenditure

· To meet short-term cash requirements, for example on days when salaries are paid

The Authority borrows from two main sources:

· The PWLB to finance capital expenditure, normally long-term at fixed rates

· The County Council at variable rates based on local authority seven day notice rates. This can be used to meet short-term cash requirements, or to finance capital expenditure when circumstances are appropriate

Although the recent trend has been down, economic forecasters are expecting long-term interest rates to rise over the next two years, although the pace of such a rise is likely to be very slow. Base rates and other short-term rates are expected to peak at no higher than 5.5%.

Until now the Authority's borrowing strategy has been based on that of the County Council. For a number of years the County Council has borrowed long-term in small amounts, maintaining a balance between long-term fixed rate debt, which provides budget stability and protection against rising interest rates, and short-term temporary debt, which enables advantage to be taken off falling rates. It is suggested that this strategy should be retained by the Authority.

2 Investment of surplus funds

During the year cashflow requirements will mean that there is no scope for any direct long-term investment on the money markets. Therefore, the Authority will invest all its surplus funds with the County Council, earning interest based on the local authority seven-day notice rate.