Archived decisions

Section 25 report, Local Government Act 2003

1 Section 25 of the Act requires the Chief Financial Officer (the County Treasurer) to report to the County Council when setting its council tax on:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget

2 The County Council is required to have regard to this report in approving the budget and council tax. It is appropriate for this report to go first to Cabinet and then made available to the County Council in making its final decision.

3 The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. Paragraph 13 of the report outlines the provisional budgets for 2010/11 and 2011/12, set in the context of the County Council's medium term financial management policies, which are reviewed in Appendix 7. The 2010/11 budget is based on firm Government grant allocations, but these do not extend to 2011/12 and therefore assumptions have had to be made on the implications for grant levels.

4 A risk assessment has been made of the cost and demand pressures on budgets, insurance liabilities, achievement of budget savings, adverse winter conditions and achievement of capital receipts which supports the proposed level of balances of approximately £16m. This assessment is set out as an Annex to the Appendix.

5 Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 6. Schools have the single biggest reserve at a projected £43.6m within their delegated budget and ring-fenced specific grant. The most important reserves for other services in terms of the three year view are the grant equalisation reserve (used to help match grant loss) and equal pay reserve.

6 Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. However the greater uncertainties extending beyond 2010/11, particularly for the County Council as a `floor' authority also informs the need for reserves and balances during the period of the current three year grant settlement, together with the impact of pay and benefits, greater risks of overspend from tight savings targets and demand led spending pressures during a recession, potential higher inflation and slippage in the achievement of capital receipts.

7 The budget report is the conclusion of a detailed process of prior consultation and consideration through out the current year by Cabinet.

8 The County Council's policy on balances is to hold a minimum prudent level which on the basis of 2009/10's risk assessment is 2.4% of the budget. This is a higher level than has been necessary historically but comparable with 2008/09, when balances were budgeted at 2.3% of the budget requirement, and remains relatively low compared with other comparable local authorities. The risks associated with being a floor authority and thus receiving the minimum increase in government grant and of needing to achieve significant savings in service expenditure to balance the budget continue to justify a higher level of balances than historically. In other respects the risks have changed over the last twelve months, with the risk of higher inflationary expectations having diminished but concerns about the length and depth of the recession and with the stability of the banking system having increased significantly.

9 The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the performance and risk management and earmarked reserves paragraphs in the budget report.

10 In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework which covers these issues. The forward budget plan and reserves take into account the main risks and uncertainties, including:

· Inflation

- the 2008 Local Government pay award has yet to be finally agreed but an assumed increase of 2.5% in 2009/10 should be adequate given the recent fall in the rate of increase in the retail price index and the effect of increased unemployment on the labour market

- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (e.g. in purchase of social care and for the cost of electricity), where higher prices are likely in 2009/10.

- short-term interest rates have been budgeted to average 1.5%, in line with the current base rates, and though this is an unprecedently low rate of interest, it could still fall a little further

· Pay drift

- increments are not budgeted for and services will need to secure efficiency savings of £2.6m to offset these. Past trends suggest that this can be managed, and service budgets have been adjusted for the impact of the new pay structure

- there is a substantial potential liability from equal pay claims arising from the pay and benefits review. None of the claims has yet been considered by the employment tribunal and an equal pay reserve estimated at £37.4m at 31 March 2009 has been built up for non-school claims. School balances will assist in meeting claims in respect of school-based staff. An application for a capitalisation direction was agreed by Communities and Local Government for 2008/09, and a further submission will be made in 2009/10 to protect against the risk of successful claims exceeding the capacity to fund them from the relevant reserves; a settlement in excess of this figure will require a capitalisation direction to enable the revenue impact to be phased over more than one financial year in order to avoid compensating job or service cuts. The Government has taken steps to assist local authorities to spread these costs by introducing regulations which allow the effect of accruals for equal pay liabilities to be disregarded for council tax setting purposes.

· The budget for 2009/10 and provisional budget for 2010/11 takes account of an increase of 0.5% in the employers' pension contribution to the Local Government Pension scheme, expressed as a percentage of pay, over each of the next two years. This is based on the outcome of the actuarial valuation at 31 March 2007 and the position for 2011/12 will not be known until after the next actuarial review

· Additional spending, savings and redeployments built in to the budget

- these are subject to planned review by Executive Members, and savings plans will need to be approved and monitored during the course of the year

· Efficiency savings and other savings

- there is a good track record covering the process of setting and achieving savings, but the national target for local authorities has increased in 2008/09 and it may become more difficult to continue to achieve year on year improvements on the scale required to meet the target.

· Income

- there is an annual review to maximise income and increase income at least in line with costs which is referred to in paragraph 6 of the report and reported in greater detail to executive members. The effects of the recession increase the possibility of reductions in some areas of income

· Achievement of budget plan

- There is a well established and sound history of very close achievement of outturn to budgets, despite the larger overspending on Adult Services than initially predicted in 2005/06, although higher balances had been held because of potential risks.

· Strength of financial information and reporting arrangements

- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year. Corporate co-ordination of budget monitoring has been strengthened with a specific focus on demand led budgets, overall employee budgets and the achievement of planned savings.

- other action plans have been put in place to consolidate and improve financial controls, including the monitoring of financial health indicators.

· Capital programme

- capital strategy, asset management plans and the local transport plan have all previously been accredited with the highest scores in the comprehensive performance assessment

- the slow down of the property market has produced a temporary shortfall of capital financing resources in 2008/09 and a further shortfall is anticipated in 2009/10. Additional revenue contributions to capital are proposed in both the 2008/09 revised and the 2009/10 budget and allowance has been made in the budget for additional unsupported borrowing to cover the immediate shortfall.

- the policy on Government borrowing approvals was reviewed in 2007/08, because as a council at the grant floor, additional `supported borrowing' is not being matched by increased revenue support grant. Restricting the automatic take-up of supported borrowing to a level which will limit the increase in the capital financing requirement relating to supported borrowing to 2.5% per annum will have a continuing impact in containing increased capital financing costs

· Level of borrowing and outstanding debt

- the issues are fully covered in the treasury management strategy and prudential indicators appendix to the budget report.

- the policy on temporary unsupported borrowing for specific projects was revised in 2006/07 and will result in the financing costs being contained within the forward budget plan cash limits without an additional impact on the council tax payer

- however as a result of much lower projected capital receipts some more general temporary unsupported borrowing is expected to be required in 2009/10 and 2010/11

· Contingent liabilities

- the County Council self-insures, so it finances all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims and a reserve is maintained to deal with fluctuations in liabilities and in the level of fire damage reinstatement, which now stands at £7.7m

· Annual Governance Statement

- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned

- the review of the effectiveness of the system of internal financial control is informed by the work of the managers within the County Council, by internal audit and the Audit Commission in its annual governance report and other reports.

- the Governance Committee receives and reviews the annual governance statement and the external audit governance report

· Audit Commission

- gave an unqualified opinion on the 2007/08 accounts, and will be announcing results of the Use of Resources CPA assessment over the next month

· Other risks

- there are potential legal claims outstanding and other possible risks which past trends suggest can be met from balances if required. There is no known significant risk or liability which requires a provision, contingency or reserve not already allowed for in the budget report

- changes in function and funding arrangements. There are no significant externally imposed changes in 2009/10, with the exception of the second phase of the transfer of the student support service to the Student Loan Company

- Though government grants have been confirmed for the next two years, the County Council's formula grant calculated from the formula is still £20.7m below the grant floor in 2010/11.The proposed policy on the use of the grant equalisation reserve will provide some scope to mitigate the immediate impact of further grant loss beyond 2010/11.

11 Provided that the County Council considers the above factors and accepts the budget recommendations, including the level of earmarked reserves and balances, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.

Jon Pittam

County Treasurer

2 February 2009