Contacts: Ejner Knudsen, Assistant Treasurer, 01962 847403

David Howells, Director of Corporate Services 02380 626835

1 Introduction

1.1 At its meeting on 17 January the Finance and General Purposes Committee considered the draft budget and the feedback from the consultation meetings held earlier that week. The recommendations from that meeting were as follows:

(a)	That the budget be set as closely as possible to a level which requires a Council Tax increase of 3.9%.
(b)	That the Capital Programme and associated Prudential Indicators, with the addition to the Capital Programme for 2008/09 of the purchase of a minibus for £19,000 from external funds, be approved.
(c)	That the Treasury Management Strategy be approved.

1.2 The text of the main report presented to the Finance and General Purposes Committee is attached as appendix A.

1.3 At the meeting Members considered the budget in detail and supported the proposals. Discussion centred around balancing the needs of the Service with the council tax and those who pay it (especially pensioners and others on fixed incomes), the efficiency savings required and the level of reserves.

1.4 Members will receive a presentation at the meeting covering the main issues surrounding this year's budget and precept.

2 Updated information

2.1 There has been just one area of movement since the position was considered by the Finance and General Purposes Committee:

Billing authorities' taxbases and collection funds surpluses and deficits

2.2 The final returns from the billing authorities on their taxbases and the surpluses and deficits on their collection funds has now all been received. The overall result is a favourable one for the Authority and changes some of the figures reported to the Finance and General Purposes Committee. The overall effect is that an additional £100,000 is available to meet the budget requirement. The total extra revenue arising from council tax, since the draft report was considered by the Authority in December, amounts to £325,000 - the equivalent to a council tax increase of 0.9%. Some of the increased income is attributed to a growth in the taxbase but a larger proportion is in the form of a one-off distribution of collection fund surpluses. It is recommended that this latest addition be used either to increase the proposed support of capital pressures by further increasing the contribution to the capital payments reserve; or, held in the general balance.

2.3 Overall, a budget requirement of £64,600,000 could be met from a council tax increase of 3.85%.

2.4 The draft budget can now be summarised as follows:

	£000
Base budget and unavoidable growth	64,163
Revenue costs of proposed capital programme	39
Contribution to modernisation reserve	341
Contribution to capital payments reserve	500
Further increase in capital payments reserve or lesser reduction to general reserve	100
Reduction in general balance	-500
Net savings required	-43
Total budget	64,600

2.5 Appendix 2 sets out the final calculation of the base budget; Appendix 3 sets out the draft budget in more detail; and, Appendix 4 sets out the 2008/09 - 2009/10 three-year outline budget. This report assumes that Members would wish to see the additional £100,000 being used to reduce the previously recommended decrease in general reserves.

3 Efficiency plan

3.1 The provisional assumptions made for the efficiency plan remain as reported to the Finance and General Purposes Committee, but Members will appreciate that those assumptions may be affected by decisions the Authority takes in relation to the Integrated Risk Management Plan which is due to be considered earlier in the meeting.

3.2 It is intended that the savings generated by the efficiency plan will become the main source of funding for service development projects and therefore determine the timing of them. Continuity can be maintained by using the modernisation reserve but as outlined in paragraphs 8.1 and 8.2 the future financial policy must be to align budget pressures and savings in this way. Progress will be monitored along with budgets by the Finance and General Purposes Committee throughout the year.

4 Capital spending

4.1 The only change to report in the proposed draft capital programme is that the 2008/09 vehicle programme now includes a minibus for the Prince's Trust. As this will be entirely funded from an external contribution it has no effect on the Authority's budget.

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

4.3 In considering the capital programme proposals Members will need 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.

4.4 Appendix 7 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 reported 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 risk analysis has now been updated and many of the risks that the Authority faced this time last year have now either eased or gone. A comparison has also been undertaken with other Fire Authorities and whilst Hampshire's proposed level of unearmarked reserves is relatively low it is comparable to some Authorities of a similar size. The risk analysis justifying the level is set out as Appendix 8. It is the Treasurer's recommendation to the Authority that the level of general balance be reduced to £1.5m.

Specific reserves

5.2 It was reported to the Finance and General Purposes Committee that it is now expected that there will be a greater call on the modernisation reserve in 2007/08 therefore reducing the available balance at the year end. In order to restore the reserve to a balance of £600,000 would now require a contribution of £355,000 and this has been incorporated within the draft budget.

5.3 As mentioned above a contribution of £500,000 to the capital payments reserve is proposed.

5.4 No other increases or decreases in reserves are thought necessary for 2008/09.

6 Budget Consultation

6.1 The budget consultation meetings were held on 15 January 2008 with representatives from the unions, businesses and council tax payers present. The feedback received is set out on Appendix 11.

7 Council tax

7.1 As mentioned above the updated draft budget presented to the Finance and General Purposes Committee now equates to a council tax increase of 3.85% which is just below the percentage increase (3.9%) that will be applied to state pensions from April 2008. This equates to a council tax of £58.23 for a band D property.

8 The future

8.1 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.

8.2 It is already known that years 2 and 3 of the medium term plan period will be much tougher with 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.

9 Response to the Government on Revenue Support Grant settlement

9.1 Attached for Members information is a copy of the Authority's response to the Government on the grant settlement for the three years 2008/09 to 2010/11 (appendix 10).

10 Treasury Management Strategy

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

11 Local Government Act 2003 - s.25

11.1 Under S.25 of the Local Government Act 2003 the Chief Financial Officer has to report to the Authority when setting its council tax on two issues:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget.

Members are required to have regard to this in approving the budget and council tax.

Robustness of estimates

11.2 The estimates have been prepared on an incremental basis based on existing commitments, adjusted for inflation and any approved savings or service developments taking into account factors such as past trends in operational incidents, staff increments and revenue effects of the capital programme. With the effective budgetary and management control arrangements that are in place, the majority of the budget can be regarded as robust. However, a few budgets such as retained firefighters' pay for example are higher risk as it is heavily influenced by factors such as the take up of pensions and activity levels. There are also other uncertainties such as the timing of capital payments or capital receipt of housing sales which are difficult to budget accurately for. These have been taken into account when proposing a general balance level of £1.5m in the draft budget.

Adequacy of reserves

11.3 Included within this draft budget are proposals to reduce the level of the general reserve to £1.5m. Given the assessment of risk associated with the Authority's budget set out above and taking into account the potential access to specific reserves and other resources, this represents an adequate level.

12 Equality impact assessment

12.1 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 revenue budget as set out in Appendix 3 be approved.

2 That the capital programme as set out in Appendix 6 and the associated prudential indicators as set out in Appendix 7 be approved.

3 That the total budget requirement for the general expenses of the Authority for the year beginning 1 April 2008 be £64,600,000.00.

4 That the Authority's basic council tax for the year beginning 1 April 2008 be £58.23.

5 That the Authority's council tax for the year beginning 1 April 2008 for properties in each tax band be:

Band A	38.82		Band E	71.17
Band B	45.29		Band F	84.11
Band C	51.76		Band G	97.05
Band D	58.23		Band H	116.46

6 That precepts be issued totalling £36,200,418.83 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the Authority, in proportion to the tax base of each billing authority's area as determined by them which are set out below:

Basingstoke and Deane Borough Council	61,753.90
East Hampshire District Council	47,352.44
Eastleigh Borough Council	43,445.08
Fareham Borough Council	42,200.00
Gosport Borough Council	27,432.40
Hart District Council	37,667.80
Havant Borough Council	42,483.00
New Forest District Council	72,101.30
Portsmouth City Council	58,709.20
Rushmoor Borough Council	30,928.94
Southampton City Council	65,410.70
Test Valley Borough Council	45,148.00
Winchester City Council	47,047.11
Total	621,679.87

7 That the Treasury Management Strategy set out in Appendix 9 be approved.

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\HFRA Budget report 13 Feb 08.doc

Attached appendices:

1. Draft budget report to Finance and General Purposes Committee (without appendices) (pink)

2. Calculation of base budget

3. Draft revenue budget (green)

4. Outline budget 2008/09 - 2010/11 (green)

5. Financing of proposed capital programme (yellow)

6. Proposed capital programme (yellow)

7. Prudential indicators summary (yellow)

8. Level of specific reserves and general balance

9. Treasury Management Strategy (salmon)

10. Authority's response to the Government on the Revenue Support Grant.

11. Feedback from consultation meetings

Appendix 1

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

Appendix 2

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	564	0.9
	Full year effect of previous years' growth	-243	-0.4
	Provision for inflation from November 2007 to outturn 2008/09	1,312	2.1
	Retained incidents	-70	-0.1
	HFRA firefighter pension costs	107	0.2
	Net change in leasing costs	-95	-0.1
		64,138	2.7

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. The additional 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% of salaries 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 3 - draft budget and 4 outline 3 year

Appendix 5

Financing of existing capital commitments and proposed capital programme

	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	-	4,515	3,734	2,619	990
Total payments	7,545	5,160	3,734	2,619	990
Financed by:
Supported borrowing	3,563	1,621	1,811	1,863	990
Unsupported borrowing	628	378	693	256	0
Revenue contributions	822	730	920	500	0
Capital contributions	18	19	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	5,160	3,734	2,619	990
Supported/unsupported(-) borrowing:
Unused Balance 1 April	2,039	-628	-1,006	-1,699	-1,955
Actual allocation	1,524	1,621	1,811	1,863	1,863
Used in year	-4,191	-1,999	-2,504	-2,119	-990
Balance 31 March	-628	-1,006	-1,699	-1,955	-1,082

Page for appendix 6 - proposed capital programme UPDATE FOR MINIBUS

Page for appendix 7 - prudential indicators

Appendix 8

Level of specific reserves and general balance 2008/09

10 Introduction

10.1 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.

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

· A provision, which is made for a known and estimated 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.

11 Level of reserves required

11.1 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.

11.2 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.

12 Pensions fluctuations

12.1 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.

13 Inflation risk: Pay

13.1 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.

13.2 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.

14 Uninsured risks

14.1 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 Fire and Rescue Authority Mutual Ltd (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.

15 Extremes of weather

15.1 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.

16 Other inflation

16.1 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.

17 Regionalisation

17.1 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.

18 Capital Programme issues

18.1 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.

19 Uncertainties in 2008/09 and beyond

19.1 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.

20 Conclusion: level of reserves

20.1 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.

20.2 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.

20.3 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 9

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).

2 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 move downwards from their current level of 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.

3 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.

4 Statutory provision for debt repayment

The CLG have consulted on draft changes to the regulations requiring local authorities to make a minimum revenue provision for the repayment of debt. The new regulation is likely to be based on a general requirement to make prudent provision and would be supported by more detailed guidance from the Secretary of State. One of the proposals in the draft guidance was that local authorities should prepare before the start of each financial year a statement on its policy for making minimum revenue provision, for approval by the full authority. The regulations and accompanying guidance are not expected to be finalised until March 2008, and once they are enacted, a policy statement will be submitted to the Authority. It is not anticipated that implementation of the new regulations will have a material impact on the Authority's capital financing costs.

Page for letter to Govt re RSG - Appendix 10

Appendix 11

Discussion meetings - 15 January 2008 - Summary of the main issues raised

· an increase of 3.9% would be generally welcome in that it would match 2008 state pensions increase

· acknowledging that `headline' percentage increases above this level would appear high ... fully appreciate that the impact on council tax payers in cash terms is very small [e.g. increase to 4.4% = an extra 27 p per year (less than 1 p per week)]

· concern expressed about the ability to deliver efficiency savings - Copnor proposal was highlighted

· do not want to see any reduction in standards of vehicles and equipment

· unions: pleased to see proposed increase in capital programme for repairs and maintenance of buildings