Contacts: Paul Carey-Kent, Deputy Treasurer, 01962 847525

David Howells, Director of Corporate Services 02380 644000 ext 2003

1 Introduction

1.1 This report sets out changes to the financial projections for 2009/10 since the draft budget was presented to the Authority last month. Members will be updated at the meeting on any other emerging issues and feedback from the statutory budget consultation meetings due to be held on 13^th January 2009.

1.2 This draft budget has been prepared in accordance with the budget strategy approved by the Finance and General Purposes Committee at its meeting on 23 October 2008. The following issues are addressed:

· spending requirements for 2009/10 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

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

2 Changes to the draft budget

Billing authorities' collection funds surpluses and deficits

2.1 Estimates have now been received from the billing authorities on their collection fund surpluses or deficits. These show an overall surplus of £225,000 allocated to the Authority.

2.2 The opportunity could therefore be taken to either increase the budget by £225,000 or to decrease the council tax by 0.6%. This, however, would be for one year (2009/10) only.

Capital

2.3 Two major issues have arisen since the Authority's meeting. On the positive side, the Government has given notice of additional capital grant of £2.1m (spread over the two years 2009/10 and 2010/11). On the negative side, the sale of the land at Carpenters Down expected in 2008/09 has fallen through. These roughly balance each other.

2.4 The knock on effect is essentially one of timing and the associated changes in financing. This has increased the borrowing costs by £31,000 in 2009/10.

Other changes

2.5 The provisions for inflation and short-term interest have been reviewed and, together with a small adjustment to the business rates, the overall impact is to reduce the base budget by £3,000.

3 Spending requirements

3.1 Potential spending requirements can be split into three main categories: base budget, unavoidable costs and any high priority growth pressures.

3.2 The base budget represents the cost in 2009/10 onwards of carrying forward policies approved in the 2008/09 budget, updated for inflation and the full year effect of any changes. These include:

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

· assumed price inflation of 2.5% (with the exception of certain expenditure items such as electricity where inflation is known to be significantly higher)

· an increase of 0.5% in the cost of employer's contributions for the local government pension scheme

· the costs of financing the capital programme.

· The full year effect of actions taken in previous years' budgets (the net effect of which is to reduce the base budget as one-off contributions to reserves were made in 2007/08). The base budget also assumes revenue contributions to capital of £730,000 per year in 2009-12 . This continues the Authority's preferred policy of purchasing vehicles from revenue as far as is possible in order to minimise the impact of unsupported borrowing. It is recommended that this sum remains unchanged.

3.3 Overall, the base budget totals £65,635,000, an increase in spending of 1.6%. If the additional £225,000 surplus on collection funds were used to reduce council tax this would equate to an increase in council tax of 0.9%. Full details are set out in Appendix 1 and Appendix 2 outlines the medium-term revenue base budget for 2009/10 - 2011/12.

Unavoidable costs

Payments for Continuing Professional Development (CPD): £150,000

3.4 These payments to Grey Book staff are made under national conditions of service and replace the former `long service increments' that were paid to staff. This is therefore the estimated net cost of implementing CPD.

Operational equipment for vehicles: £40,000

3.5 This is to cover the replacement of equipment on front line vehicles which does not last the life of the vehicle and therefore needs to be replaced earlier. This increase enables a planned replacement programme to be established.

Replacement of operational equipment: £201,000

3.6 The following equipment is either obsolete or has reached the end of its life: breathing apparatus, personal protective equipment (helmets), high-rise branches and rope packs. The equipment's replacement would be financed either through increases in the revenue budget or by revenue contributions to capital.

High priority growth pressures

3.7 The following items represent only those considered to be of the highest priority by the Service Management Team.

Cost of borrowing: £10,000

3.8 This is the revenue effect of the proposed capital programme (the statutory provision for debt repayment and interest payments). Although it adds just £10,000 in 2009/10, the impact rises to £130,000 by 2012/13.

Fuel: £100,000

3.9 This is the estimated increased cost of additional travel associated with carrying out current and proposed community safety activities.

Repairs and maintenance of buildings: £200,000

3.10 The Authority has identified that the repair and maintenance backlog represents a strategic risk. Increasing the relevant revenue budgets will help to mitigate the risk. This sum available can be increased by a further £50,000 from savings in the existing budget for new hydrant schemes (a budget that has been underspent in recent years).

Assessment and Development Centres: £100,000

3.11 This is the cost of running supervisory, middle and strategic management Assessment and Development Centres (ADCs). A well-designed customised ADC is an effective tool for measuring the key behaviours important to employees' present success and future potential. The full cost of running these ADCs is estimated to be £200,000 but this would be offset by efficiency measures across existing training budgets.

One-off Pressures £225,000

3.12 It would be highly desirable to build in the flexibility to improve station facilities (eg to improve environmental sustainability and facilities for female firefighters) and to allow for investment in IT on a spend to save basis. Such flexibility could be built in by contributing to the Improvement and Sustainability Reserve, so enhancing capacity to respond to such requirements.

Summary

3.13 The following table summarises the above and shows the three year costs:

	2009/10 £000	2010/11 £000	2011/12 £000
Unavoidable growth:
CPD payments	150	150	150
Operational equipment - vehicles	40	40	40
Breathing apparatus	45	48	383
Helmets	80	80	80
High rise branches and hose	61	0	0
Replacement of rope packs	15	15	15
Total unavoidable costs	391	333	668
High priority:
Revenue costs of proposed capital programme	10	48	86
Vehicle fuel costs	100	100	100
Buildings maintenance (revenue budget)	200	200	200
Supervisory, middle and strategic management ADCs	100	100	100
One-off pressures	225
Total high priority items	635	448	486
Total unavoidable and high priority items	1,026	781	1,154

4 Level of reserves and general balance

General balance

4.1 The Authority will have a £1.6m general balance at the end of 2008/09. The detailed work re-assessing the risks has been undertaken and the results are set out in Appendix 6. It is recommended that this level of reserves should be maintained.

Specific reserves

4.2 The Authority may also set up reserves for expected future spending which are more specific in nature. The current specific reserves are:

· Capital payments reserve. A contribution to this reserve of £500,000 is budgeted for in 2008/09. It is expected that it will be used during the year leaving a nil balance at the end of 2008/09 (subject to any contribution from underspend 2008/09).

· Improvement and sustainability reserve (formerly `modernisation reserve'). This reserve was originally set up (in July 2005) to help meet the costs of delivering the Government's modernisation agenda for fire and rescue services. This has largely been achieved and it is considered timely to change the use of the reserve for delivering in-year value for money improvements and pump-priming environmental initiatives. It is currently estimated that £341,000 will be added to the reserve during 2008/09 leaving a balance of £703,000 at 31 March 2009. For the purposes of this report it has been assumed that Members would support the proposal in paragraph 3.12 increasing this by £225,000 in 2009/10 using the estimated collection surplus on the Council tax as notified by the tax-collecting authorities. This will increase the flexibility available to fund the cost of developing a new management information for vehicle maintenance, works to improve facilities for female firefighters and environmental sustainability at fire stations.

· Equal pay reserve. This was set up last year to meet the backpay costs of implementing the equal pay review. The balance of this reserve stands at £300,000. Unfortunately progress of the review has been slower than originally anticipated and implementation may be delayed to 2009/10. In that event, this reserve will therefore be carried over to next year to be available for use when the new pay scales are implemented, and will as a result increase to £600,000 to allow for the additional pay which was budgeted for in 2008/09 to be met in 2009/10 as necessary, along with any pre-2008/09 backpay.

Savings and efficiency measures

4.3 The District Auditor, in his draft Use of Resources assessment, stated that the Authority is performing well. The Authority has scored `3' in all areas covered - financial reporting, financial management, financial standing, internal control and value for money.

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

· minimise the level of council tax

· deliver the efficiency improvements required by Government targets

· maximise the scope for redirecting resources to implement objectives in the Authority's current and proposed corporate plan.

4.5 The Comprehensive Spending Review 2007 (CSR07) expects this Authority to make cashable savings of £1,055,000 in each of the three years from 2008/09 - 2010/11. It is pleasing to be able to report that all the required efficiencies have been identified, exceeding the target by £349,000. These are summarised on Appendix 3 together with a summary of how the savings have been applied to improve services.

5 Capital Spending

5.1 The proposed capital programme for the three years 2009/10 to 2010/11 is set out in Appendix 3. This includes all existing commitments revised to reflect the latest estimate of costs for 2008/09 the details of which are set out below.

Vehicles

5.2 The vehicles programme for 2009/10 to 2011/12 is as presented to the Finance and General Purposes Committee in October 2008 with the costs updated to 2009/10 outturn prices.

5.3 In recent years revenue contributions have been set at £500,000 - plus the capital costs incurred from converting operational leases to finance leases. This practice has been reviewed and, from 2009/10, all will be straightforward extensions of the current operational lease agreements. This could have led to a reduction in revenue contributions to capital from £730,000 to £500,000. However, one of the implications of the new capital financing regulations (which came into force on 31 March 2008) is the requirement to make a larger provision for debt repayment if unsupported borrowing is used to finance the acquisition of vehicles and equipment. It is therefore recommended that the current level of revenue contributions be maintained (£730,000). This has been assumed in the draft budget.

Asset Management - Buildings Maintenance

5.4 Members are aware that the increasing backlog of building maintenance needs is considered to be a strategic risk for the Authority.  The need to address this is a proposed corporate objective for 2009/10.  The current total value of revenue budgets for the repair and maintenance of the built estate is about £1.2m.  This covers expenditure on: term-contracts for electrical and mechanical maintenance, gas appliance servicing, appliance bay doors servicing, portable appliance testing. Also covered are costs associated with planned maintenance (including internal and external decoration), high priority repair needs identified from condition surveys and urgent unplanned repairs.  There is very little scope to carry out any significant improvements to buildings unless these can be incorporated into major repair and maintenance works. As noted in paragraph 2.11 above, it is recommended that these revenue budgets be increased by £250,000 (offset by £50,000 from the provision for hydrant schemes) to help deal with the maintenance backlog. Also (as noted in paragraph 4.2) there would be some scope to utilise the reserve for `improvement and sustainability' to fund any urgent or `spend to save' buildings maintenance and improvement initiatives.

5.5 A separate provision of £450,000 has been made in the capital programme for improvement works.  Over the next three years this will be used essentially to progress the programme of improvements works identified by condition surveys where appropriately treated as capital .

Basingstoke Fire Station

5.6 Members may recall that there are particular problems with the main fabric of Basingstoke Fire Station.  Some urgent temporary works have been carried out to make safe the brick cladding panels (the cavity wire-ties had become corroded).  Options to provide a long-term fix have been obtained: the two feasible solutions are estimated to cost either £506,000 or £780,000.  Given other competing pressures on the revenue budget and capital programme, there is little scope to accommodate this work in 2009/10.  This will therefore be re-considered in the context of the wider review being undertaken on the longer-term needs for the fire station at Basingstoke. 

Private Finance Initiative (PFI)

5.7 Given that £130 million of PFI credits were available nationally, officers have considered the possibility of making a PFI bid to tackle the programme of repairs needed.  However, it is more usual to use PFI for new-build schemes rather than for maintenance works for two reasons.  Firstly, it is harder to set up the necessary risk transfers for maintenance work; and secondly the value of such schemes is such that, in order to reach the indicative scale required for PFI projects of £20 million, inter-authority collaboration is necessary.  South East fire and rescue authorities were asked whether they were interested in collaborating on a bid of this type, but none were.  Consequently, this possibility has not been pursued.  So, although PFI would be potentially advantageous, it is considered that, realistically, the maintenance backlog will need to be addressed through more conventional means.  In addition PFI has also been adversely affected by the credit crunch.

Winchester Fire Station

5.8 At the Authority's last meeting Members supported the recommendation to increase the starts value of this project to £4m. These costs have been incorporated into the base budget.

Capital Financing

5.9 The latest estimated costs and the proposed financing of the capital programme is set out on Appendix 5.

5.10 Points to note on capital funding are:

· The potential purchaser has withdrawn from the acquisition of the land at Carpenters Down, for which a substantial receipt had been expected and factored in to funding projections. Alternative sale options will be pursued, but for the purposes of setting the budget it is assumed that the Authority will now retain this land until market conditions improve and a worthwhile capital receipt can be obtained.

· The Department of Communities and Local Government has announced a capital grant of £2,096,000 (£881,000 in 2009/10 and £1,215,000 in 2010/11). No conditions are attached, and so it is possible to use this, in effect, to replace the bulk of the funding previously expected from sales of the land at Carpenters Down.

· It has been assumed that the sale of Winchester Fire Station will generate a capital receipt in 2011/12.

· The capital receipt from the sale of Copnor Fire Station has not yet been assessed and built into the above figures. It is possible - and has been adopted as a working assumption - that this will offset any reduction in the values from the receipts assumed above if property values continue to fall. However, given the general economic background the position will be closely monitored throughout the year, with receipts from Copnor being built in only when their value and timing and the impact of any other changes in likely receipts as a result of the economic downturn become clearer.

6 Government grant

6.1 CSR07 set out the Government grants for 2009/10 and 2010/11. For 2009/10 it is just 1.7% above that received for 2008/09, with 2010/11 being 1.9% above the 2009/10 figure. In setting the budget and council tax for 2009/10, it is important to take account of the potential knock-on effect the decisions may have on future years.

7 Council tax and consultation

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

Council tax strategy: link to state pension increase

7.2 Over the last four years, the Authority has pursued a policy of aiming to keep the level of council tax increase at or below of the increase in state pensions - averaged over a three year period. The table below sets out the position over the previous two years and shows maximum increase possible (4.1%) for 2009/10 if the policy is to be continued.

	Council tax increase (%)	State pension increase (%)
2007/08	4.5	3.6
2008/09	3.9	3.9
2009/10	4.1	5.0
Average	4.2	4.2

Consultation options

7.3 The Authority agreed to consult on four council tax increase options:

7.4 Information on the increase in income from council tax collection was received after the Authority's meeting, so at the consultation meetings it was pointed out that each of these options could potentially be reduced by up to 0.6%. However, given the volatility in the capital programme position (particularly regarding future capital receipts) and the general uncertainties in the economic climate, it was explained that it would recommended to the Authority that the additional £225,000 would be added to reserves.

7.5 Trends in the Authority's budget and council tax over recent years are as follows:

	Budget	Budget increase	Council tax at Band D	Council tax increase
	£m	%	£	%
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	64.6	3.4	58.23	3.9
2009/10 Base Budget	65.6	1.6	59.04	1.4
Option A	66.3	2.6	59.73	2.6
Option B	66.5	3.0	60.15	3.3
Option C	66.7	3.2	60.38	3.7
Option D	66.8	3.4	60.62	4.1

7.6 It is currently estimated that each £1m (1.5%) increase in spending adds approximately £1.61 (2.75%) per year to the band D council tax.

Comparison with other fire and rescue authorities - 2008/09 council tax

7.7 The Authority's council tax for 2008/09 at £58.23 for a Band D property is the 8^th lowest of all 24 non-metropolitan fire and rescue authorities. It is the median of the combined fire authorities in the South East Region. It is significantly lower than Kent (£63.81) and Essex (£62.28) - the two most comparable authorities.

8 Treasury Management Strategy

8.1 The Authority is responsible for approving the annual Treasury Management Strategy which includes some specific recommendations. This is attached as appendix 8 for Members consideration.

9 Policy on Minimum Revenue Provision to repay debt

9.1 The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 require that before the start of each financial year, a local authority prepares a statement of its policy on making Minimum Revenue Provision (MRP) for the approval of the Full Council or equivalent.

9.2 It is recommended that the Authority continues with the policy adopted for 2008/09 i.e. to continue to calculate MRP in respect of supported capital expenditure, incurred both before and after 1 April 2008, in accordance with the previous regulations (i.e. generally based on 4% of the Authority's outstanding capital financing requirement). In respect of unsupported borrowing relating to capital expenditure incurred after 1 April 2008, it is proposed to calculate MRP on the basis of asset life, using the equal instalment basis and adopting asset lives that are no greater than those used to calculate the depreciation provision for the relevant assets.

10 Recommendations

1 That the Committee recommend to the Authority its preferred level of budget and/or council tax for 2009/10 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 7 of this report.

3 That the Authority be recommended to approve the Treasury Management Strategy and the recommendations contained within it as set out in Appendix 8 of this report.

4 That the Authority be recommended to approve the policy on Minimum Revenue Provision as set out in section 9 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:

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 base budget 2009/10 - 2011/12 (green)

Appendix 3 - Efficiencies and how they can be applied

Appendix 4 - Existing capital commitments and proposed programme 2009/10 - 2011/12 (yellow)

Appendix 5 - Financing of capital programme 2009/10 - 2011/12 (yellow)

Appendix 6 - Levels of reserves

Appendix 7 - Prudential indicators

Appendix 8 - Treasury Management Policy

Appendix 1

Calculation of the base budget

1 Summary of changes in the base budget

2 Full year cost of inflation to November 2008 prices

2.1 The original budget has been increased by the actual costs of inflation to November 2008. Total inflation is £395,000 for pay and prices.

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 decrease these budget heads overall by a net £313,000 in 2009/10. This is mainly due to reduced borrowing as a result of more capital receipts being assumed and also lower interest rates.

5 Full year effect of previous years' growth and budget adjustments

5.1 These decrease the budget by £354,000. This is mainly due to the one year adjustments included in the budget for the contributions to the modernisation and capital payments reserves offset by the reduction in the general balance.

6 Retained pay - number of incidents

6.1 The budget is currently based on 24,198 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 2009/10 and the average number of incidents decreases to 23,692 which in turn decreases the retained pay budget by £52,000.

7 Provision for future inflation

7.1 The provision for inflation from November 2008 to March 2010 has been calculated based on 2.5% for firefighters and for support staff, 5.0% for pension payments that the Authority is still liable for and 2.5% for most other costs (the notable exception being electricity which has been provided for at 71%) 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 decrease by £34,000 in 2009/10.

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 some additional revenue costs of finance leases taken out.

Appendix 3

Efficiencies and how they can be applied

1. Efficiencies:

2. How they can be applied:

Financing of Capital Programme 2008/09 - 2011/12

	08/09 £'000	09/10 £'000	10/11 £'000	11/12 £'000	12/13 £'000
Payments: existing commitments	3,915	3,477	1,200	-	-
Payments: proposed programme -2009/10 - 2011/12 starts	-	1,689	2,969	3,567	920
Total payments	3,915	5,166	4,169	3,567	920
Financed by:
Supported borrowing	1,239	1,811	1,650	450	95
Unsupported borrowing	0	991	0	0	72
Revenue contributions	860	730	730	694	0
Capital contributions	37	0	0	0	0
Capital grant	135	318	1,778	0	0
Capital payments reserve	500	0	0	0	0
Capital receipts	1,115	1,316	11	2,423	753
Finance lease	29	0	0	0	0
Total financing	3,915	5,166	4,169	3,567	920
Supported/unsupported(-) borrowing:
Unused balance 1 April	-922	-540	-1,531	-1,318	95
Allocation (est. for 2011/12)	1,621	1,811	1,863	1,863	0
Used in year	-1,239	-2,802	-1,650	-450	-167
Balance 31 March	-540	-1,531	-1,318	95	-72
Capital receipts:
Unused balance 1 April	0	274	823	812	753
Estimated in year receipts	1,389	1,865	0	2,364	0
Used in year	-1,115	-1,316	-11	-2,423	-753
Balance 31 March	274	823	812	753	0

Appendix 6

Level of specific reserves and general balance 2009/10

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 the pay award for 2008 has not yet been agreed, let alone 2009.

4.2 In 2007/08 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 2009 pay awards and the Government is likely to press down on awards in the context of the credit crunch, a figure of £100,000 is considered reasonable for 2009/10.

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. This is one of the harder areas to assess, but it was increased to £800,000 to reflect uncertainties around the legal status of mutual insurance arrangements. Now that alternative arrangements have been made, a return to the figure of £600,000 is proposed, based on the historic number of uninsured risks tending to come forward and the continuing trend towards more litigation.

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 £80,000.

8 Regionalisation

8.1 No recognition of regionalisation is thought necessary in calculating the level of general balance for 2009/10. This will, however, be an area to keep under review.

9 Capital Programme issues

9.1 The Authority has a significant capital programme under way. 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 £800,000 would not appear unreasonable: the increase from 2008/09 reflects the additional uncertainty around capital receipts (for which more allowance might have been needed had the position re the sale of Carpenters Down not been clarified already, or had receipts from the sale of Copnor been factored into the capital programme ) .

10 Uncertainties in 2009/10 and beyond

10.1 The Authority continues to face some uncertainties, such as the transition to regional control arrangements and the introduction of Firelink. But other recent change agendas are now either integrated into normal working (eg IRMP, take up of pension by retained firefighters), are provided for specifically (equal pay) or have receded in likelihood (possible merger with the Isle of Wight). Again it is difficult to rationalise a formula-based approach to these, but compared with £800,000 in 2007/08 and £400,000 in 2008/09 a sum of £200,000 would not appear unreasonable for the 2009/10 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 £1,560,000. Given the imprecise nature of the assessment, it is reasonable to round this to £1.6m. 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	Assessed impact 2009/10 £000
Pensions: payments	50	50	50
Inflation: pay	370	0	100
Uninsured risks	600	800	600
Extremes of weather	250	250	250
Inflation: other	40	70	80
Capital factors	500	500	800
Future years' uncertainties	800	400	200
	2,610	2,070	2,080
x 75%	1,958	1,550	1,560
Rounded £100,000	2,000	1,500	1,600

11.4 Accordingly, it is proposed the budget for 2009/10 should be built on the basis of providing for a £1.6m level of reserves.

Appendix 8

Treasury Management Strategy 2009/10

1 Summary

1.1 The Hampshire Fire & Rescue Authority adopts the key recommendations of CIPFA's Treasury Management in the Public Services: Code of Practice (the Treasury Management Code), which includes an annual report on the treasury management strategy and plan before the start of the year. It places a number of responsibilities on the Authority, including the following:

· Approving an annual borrowing strategy at its annual budget meeting, to cover the raising of capital finance and the management of the Authority's long-term debt portfolio, focusing on the minimisation of risk.

· Considering at the same time the Authority's Annual Investment Strategy.

1.2 This strategy recommends that:

· long-term fixed-rate borrowing of up to £1.8m during 2009/10 should be taken out from the Public Works Loan Board (PWLB), whilst maintaining the target variable/fixed rate ratio of 50% / 50%. If circumstances are appropriate to do so then this limit can be exceeded.

· the Annual Investment Strategy described in section 4 be approved.

2 Capital finance and debt

2.1 Total capital expenditure for 2009/10 is estimated to be £5.166m, of which £1.316m is to be financed from the proceeds of asset sales during the year, £0.318m from capital grants, and £0.73m from revenue contributions. The balance of £2.802m will be financed from borrowing.

2.2 Since the Fire & Rescue Authority was established in April 1997, a number of long-term fixed-rate loans totalling £5.95m have been taken from the Public Works Loan Board (PWLB) in line with the strategy previously agreed.

Date	Amount	Rate	Year of maturity
	£	%
March 1998	350,000	5.875	2023/24
October 2000	350,000	5.0	2020/21
August 2001	750,000	4.875	2022/23
November 2001	650,000	4.875	2020/21
November 2001	450,000	4.5	2021/22
July 2002	350,000	5.0	2024/25
August 2002	100,000	4.875	2019/20
August 2002	100,000	4.75	2026/27
September 2002	150,000	4.625	2020/21
July 2004	500,000	4.95	2031/32
August 2004	500,000	4.85	2032/33
September 2004	500,000	4.75	2033/34
November 2004	350,000	4.65	2033/34
December 2006	350,000	4.2	2036/37
July 2007	500,000	5.0	2037/38

2.3 Given that PWLB rates are currently at relatively low levels (around 4.0% for 30-year money), the opportunity could be taken to take new long-term fixed-rate loans in line with the 2009/10 identified borrowing requirement. This would finance the planned capital assets at historically low rates against the risk of future long-term fixed interest rate rises.

2.4 However, a balance needs to be drawn in the debt portfolio between long-term debt at fixed interest rates from the PWLB and other sources and debt where interest is payable at variable rates. Fixed-rate long-term debt means that interest costs are more stable and less vulnerable to changes in interest rates. Short-term debt is sensitive to changes in interest rates and enables savings to be made when interest rates fall but means higher costs when they rise.

2.5 If no further fixed-rate long-term borrowing takes place between now and the end of March 2009, £5.95m or 43% of HFRA's estimated capital financing requirement as at 31 March 2009 of £13.74m will be held at fixed interest rates.

2.6 An estimated capital financing requirement as at 31 March 2010 of £15.497m would allow the taking up of a further £1.8m new fixed-rate long-term borrowing to March 2010 in order to adhere to the target variable/fixed rate ratio of 50%/50%. This limit can be exceeded if circumstances are appropriate.

3 Interest rates and borrowing strategy

3.1 After having reached a peak of 5.75% in July 2007, a succession of cuts meant that by December 2008 the Base Rate of 2.0% had fallen to its lowest level since the Bank of England was formed in 1694. Further cuts are widely expected and Gordon Brown has not ruled out the possibility of interest rates dropping to zero.

3.2 Inflationary concerns have all but dissipated and whilst Consumer Price Index (CPI) inflation in November 2008 stood at a higher than expected 4.1%, it would seem that the current downturn will inevitably lead to this figure falling sharply over coming months.

3.3 Based on 25-year term fixed-rate maturity PWLB loans, long-term borrowing rates initially rose from 4.5% in early January 2008 and peaked at just above 5.0% in June 2008 before falling back to their current low rate of 4.0% in early January 2009.

3.4 It is envisaged that longer-term interest rates will remain on a stable path over the next year at around 4.0%, although the most recent downward trend could indicate the possibility of marginally lower rates becoming available during 2009.

3.5 Therefore, the strategy will be to take out long-term fixed-rate borrowing from the PWLB of up to £1.8m in the period to March 2010 at a rate of 4.0% or less.

3.6 If fixed-rate long-term borrowing rates were to either fall still further or clear signs of a rising trend in rates was to occur, consideration would also be given to taking out further advances to cover the Authority's future years' capital financing requirements to March 2012.

4 Investment of surplus funds - Annual Investment Strategy

4.1 This proposed Annual Investment Strategy has been prepared in accordance with guidance issued under section 15(1)(a) of the Local Government Act 2003.

4.2 When investing its surplus funds, the Authority's investment priority is to continue to maintain the security of capital and maintain policy flexibility through liquidity of its investments. The Authority will aim to achieve the optimum return on its investments commensurate with the proper levels of security and liquidity.

4.3 Accordingly, only `specified investments' will be used in 2009/10. These categories of investment are defined in the Government's guidance as offering both high security and liquidity.

4.4 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.

4.5 Whilst the Authority is not expected to hold any surplus funds during 2009/10, in the unlikely event that the Authority has surplus funds available these will either be invested in:

· Fixed-term deposits for periods of up to three months with local authorities, the Government's Debt Management Office, or banks and building societies rated at least A2 by Moody's (a Government-recognised credit rating agency) that are included on Hampshire County Council's lending list;

· Call deposits in three managed AAA-rated money market funds included on the Authority's lending list, which are given as follows:

- Standard Life Sterling Fund

- Fidelity Institutional Sterling Cash Fund; and

- RBS Global Treasury Sterling Fund;

- Call deposits with the County Council.

4.6 Such `call deposits' could be recalled by the Hampshire Fire & Rescue Authority at any time.

4.7 The banks and building societies included on the Authority's current lending list are given as follows:

· Lloyds TSB

· Royal Bank of Scotland (NatWest)

· Barclays

· HSBC

· Abbey

· Nationwide Building Society

· Britannia Building Society

· Yorkshire Building Society

· Coventry Building Society

· Chelsea Building Society

· Skipton Building Society

· Leeds Building Society

4.8 The lending list is closely monitored and reviewed using Moody's ratings. Institutions will be removed immediately from the list if any doubt is cast on their creditworthiness.

4.9 Limits are placed on levels of total deposits made with individual institutions, and will run for a maximum term of up to one year. The lending term will be shorter in respect of those institutions with lower credit ratings.

4.10 Changes to the lending list and the limits on investments will be subject to the approval of the Treasurer.

4.11 Other, or `non-specified', investments will not be used.

4.12 The Treasurer's treasury management staff operate within detailed parameters set out in an internal code of practice, which takes account of CIPFA's Treasury Management in the Public Services: Code of Practice and other guidance issued by the Chartered Institute of Public Finance and Accountancy.

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