Contacts: Paul Carey-Kent, Deputy Treasurer Tel: 01962 84 7525

David Howells, Director of Corporate Services Tel: 023 8062 6833

1 Introduction

1.1 This report considers various budget issues for the coming three years together with parameters for setting the 2009/10 budget and council tax. It needs to be read in the context of the Authority's draft corporate plan which is currently out for consultation. The two processes will develop in parallel.

1.2 The financial year 2009/10 is the second year of a three-year Government settlement under its `Comprehensive Spending Review 2007' (CSR07). So, whilst the CSR07 provides a relatively sound basis for financial planning for 2009/10 and 2010/11, assumptions about 2011/12 are necessarily more speculative. The current volatility of the economy may also have an effect: predictions of inflation, interest rates and capital receipts are likely to be subject to more than the usual level of fluctuation.

1.3 It is proposed that the key financial policy aims for this three-year period should be:

· to take full account of the pressures on council tax payers and seek, so far as compatible with operational delivery, to contain council tax increases to that of general inflation and pensions increases averaged over the three-year period;

· to keep reserves and balances at an appropriate level as indicated by risk assessment; and

· to focus on efficiency gains as the key means by which continuous improvement can be maintained within the available resources.

1.4 Against that background, this report considers the influence of national and local issues likely to impact on the budget preparation process, and recommends the assumptions to be used in forecasting the cost of current service levels.

1 Base budget

1.1 The base budget represents the cost in 2009/10 of carrying forward the existing level of service and policies from the current year, updated for inflation and the full year effect of any changes. The main factors assumed in its preparation will be:

· provision for pay awards of 2.5% to all staff;

· provision for price inflation of 2.5%; and

· interest rates at 5.5%

1.2 In addition, given the volatile nature of fuel inflation, specific inflation factors will be calculated for these budget heads, which may lead to an overall inflation increase of slightly more than 2.5%.

1.3 Government policy on future pay increases in the public sector still assumes 2%; but, with current offers exceeding that level, it is considered prudent for the initial provision to reflect the current climate.

2 Comprehensive Spending Review 2007

2.1 CSR07 was based on average grant increases of 3.2%, 2.0% and 2.0% across the three years for the fire and rescue service as a whole. Hampshire, as a `floor' Authority, receives only 2.32%, 1.68% and 1.94%. Even the average national figures are well below the expected rate of inflation, but that in part reflects the Government's expectation that authorities will make efficiency savings.

2.2 A grant increase of 1.68% for 2009/10 and 1.94% in 2010/11 can therefore be taken as firm working assumptions. The medium-term plan has been based on 1.9% in 2011/12 on the basis that this represents a continuation for one year of the average three-year settlement for Hampshire across CSR07 and also the overall percentage being assumed by the Government. Clearly this is a very broadly-based working assumption.

3 Grant distribution

3.1 The Department for Communities and Local Government has initiated work to assess options for altering the grant distribution mechanisms for fire and rescue authorities. Implementation of any outcomes from that review is likely to be from 2011/12, so it is too early to include any assumptions in this consideration of the Authority's medium-term financial strategy.

4 Efficiency savings

4.1 There are, in principle, three main reasons to pursue efficiency savings:

· to provide the best service to the public at the lowest possible cost;

· to meet Government efficiency targets: for this Authority that is 1.6% (£1.055m) per year during CSR07 and it is sensible to assume a similar level for the third year; and

· most importantly for budget strategy purposes, to take actions which either allow new pressures on the budget to be met without additional expenditure or which reduce the cash requirement.

4.2 Given the tight settlement, it is appropriate to plan on the basis of meeting any new pressures beyond the base budget from efficiency savings. An ambitious target would be to meet the Government's requirements of local government as a whole, which are for 3% efficiency gains per year - whilst recognising that the Fire Service has a lower national target in recognition of the impact of modernisation and efficiencies already achieved.

5 Budget pressures

5.1 An initial review of the budget pressures which will need to be found through efficiency measures if the approach set out above is adopted, is as follows:

· operating at full establishment because of low levels of turnover

· need to recognise the ongoing aspects of the additional retained firefighter costs incurred in 2008/09

· potential impact of equal pay review if reserve of £300,000 proves to be insufficient

· all travel-related expenditure likely to be in excess of current budgets owing to high fuel prices

· revenue expenditure on repairs and maintenance of buildings; and minor improvements to facilities on fire stations - Basingstoke especially

· the Firelink project to replace the existing radio system and to provide a future mobile data technology still has some uncertainties as to actual costs for FRS's, particularly in terms of ongoing costs associated with airtime use and the support equipment  we will be responsible for installing on each fire station, eg the installation of a vehicle charging facility for every vehicle fitted with Firelink technology. At this time we have no indication of actual costs for support equipment as the final specification has not been determined and no announcement has be made as to airtime costings. The cost of most of the radio and mobile data equipment fitted in the vehicles is funded from the project.

6 Capital programme

6.1 The Authority supports an extensive capital programme covering new-build and major repairs to buildings and a full vehicle replacement programme and supported by various means. Work will continue to extend this forward to 2011/12 and the proposed capital programme will be presented to the Authority in December.

6.2 However, as has been highlighted, this programme does not adequately address the underlying need to improve the condition of the Authority's assets. To bring the estate up to good condition is estimated (from condition survey work carried by the Authority's policy advisers) to cost in excess of £5.5m over the next five years. It is unlikely that the Authority can generate the resources to tackle this successfully, so this would require a combination of:

· capital receipts - whilst the level of housing receipts has now dropped and the timing slipped, the expected sale of the land at Basingstoke and Winchester Fire Stations have now been incorporated into the forward plans and potential receipt from the sale of Copnor Fire Station will be added in due course. Consequently, the overall programme has not been reduced as a result of the fall in anticipated housing receipts.

· prudential borrowing; and possibly

· Private Finance Initiative (PFI). PFI funding credits of £130m are available nationally. The Government's guidelines suggest that a worthwhile PFI scheme would be valued at £20m or above. Work is being undertaken to explore the possibility of a regional and/or joint authority bid for a buildings maintenance and improvement.

7 Developing issues

7.1 The following are future issues which are difficult to quantify at present, but could prove significant. They are shown together with the treatment adopted in the medium-term strategy:

· Involvement in regional initiatives: assumed cost-neutral for planning purposes because of the scope to access funding from the South East Fire Improvement Partnership

· Regional Control Centre. The Government's business case suggests that, once fully implemented, this will save Hampshire £322,000 per year. The Authority would of course resist any attempts to transfer its savings to another Authority which appears to fare less well under the business case assumptions. However, in view of this risk, the uncertainty remaining in the business case assumptions, the possibility of additional transitional costs and the potential cost of `out of scope' activities, it has been assumed that implementation will be cost neutral in 2011/12.

· Equal pay audit timing and amounts remain unknown. Provision has been made of £300,000 in the base budget for recurring costs and of £300,000 in reserves for one-off implementation costs and it is not proposed to adjust that sum at this stage.

· Members will be aware of the condition of the Basingstoke Fire Station building. There are major problems with the exterior brickwork cladding and the `temporary fix' is coming to end of its five-year life. A feasibility study is being undertaken looking at the costs of various linger-term options. The outcome of the review will be reported to the Authority in due course.

8 Reserves

8.1 The Authority currently holds reserves as follows:

8.2 It is currently anticipated that the Capital payments and Equal pay reserves will be fully utilised and the Improvement and sustainability reserve partially used by the end of the current financial year.

8.3 At this stage there are no compelling reasons to vary these reserves, but the position will be reviewed as part of the process to finalise the 2009/10 budget.

9 Council tax

9.1 Current indications are that the council tax base will increase by 0.5% in 2009/10, but that the recent increases in tax base are likely to level-off thereafter. That will be built into the forecast.

9.2 If the Authority is to set a council tax increase equating to the level of inflation / pension increases over the period of three-years from 2009/10, that is likely to restrict the increase to 5% (the annual inflation figure to feed in to pension increases), ie not far off the likely capping limit in any case. That will be used as a starting point in the illustrative budget, based on estimated future inflation levels. Each increase of 1% in the council tax will increase the Authority's budget by £350,000.

10 Conclusion

10.1 If members agree, then the base budget and draft three-year capital programme will be worked up following the parameters set out in this report and presented, as usual, to the Authority's December meeting.

11 Recommendations

11.1 That the funding pressures and planning assumptions set out in this report be endorsed as a basis for preparing the Authority's medium-term financial strategy (2009/10 to 2010/11) and budget for 2009/10.

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.

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