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

David Howells, Director of Corporate Services Tel: 023 80626833

1 Introduction

1.1 The draft budget is based on the strategy approved by the Finance and General Purposes Committee at its meeting on 29^th October 2009. The strategy anticipates very tight financial constraints in public sector expenditure from 2011/12 onwards. It takes into account:

· Spending needs for 2010/11 but, with a particular emphasis on planning for the longer term

· The main financial risks faced by the Authority and an initial assessment of the level of reserves and provisions to meet them

· Priorities for capital investment

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

A number of budget scenarios are considered. These show the longer-term impact of some options for setting the level council tax in 2010/11. Overall the Authority is well-placed for 2010/11 because only a small increase in base budget costs is proposed. It is also fairly well-placed in the longer term because of plans to generate savings. However, it is likely that the grant funding will fall sharply and there are potential capital spending pressures. So, the decision on the council tax levels for 2010/11 needs to be made in this uncertain context.

1.2 The report is structured as follows:

2 Recommendations

3 General context

4 The current year: 2009/10

5-8 Spending requirements 2010/11

9-11 Risks and level of reserves and balances

12 Financial performance and efficiency strategy

13-17 Capital

18-20 Options for setting the Council Tax for 2010/11

21 Nature of savings required

22 People impact assessment

2 Recommendations

1. That the base budget set out in appendix 1 be approved.

2. That the Authority consults on council tax increase options for 2010/11 of 0%, 1.5% and 3%.

3. That the final budget and council tax be set, following consultation, at the Authority's meeting on 10th February 2010.

3 General context

3.1 2010/11 is the final year of the Government's three-year settlement under its Comprehensive Spending Review 2007 (CSR07).

3.2 The Government has confirmed a 1.9% increase in grant for the Authority for 2010/11, but no information for future years is expected prior to the forthcoming general election. It is however clear that there will be a period of severe restraint on public finances with likelihood of substantial reductions in Government grant.

3.3 So, although CSR07 provides a relatively sound basis for financial planning for 2010/11, assumptions about 2011/12 and beyond are very speculative. The current volatility of the economy may also have an effect. Predictions for inflation, interest rates and capital receipts are more difficult to make than usual.

3.4 In this context the Finance and General Purposes Committee have already agreed that the key financial policy aims for this three-year period should be to:

· Focus on efficiency gains as the means by which continuous improvement in delivering services can be maintained. To that end, some of the Authority's proposed corporate objectives, currently being consulted on, aim to produce cashable savings.

· Plan to deliver savings in 2010/11 and then carry these forward to mitigate the greater financial pressures from 2011/12 onwards.

· Keep reserves and balances appropriate to current financial risk assessments including recognition of the significant level of uncertainty in the economy.

· Take account of the pressures on council tax payers. Aim, so far as possible, to contain council tax increases to that of general inflation and pensions increases averaged over a three-year period.

4 The current year: 2009/10

4.1 An underspending of about £0.4m is currently projected: £377,000 as reported in the last budget monitoring report plus a £30,000 return of operating surplus from winding-up `FRAML' (the insurance mutual). The draft budget assumes that will be achieved and used to increase the level of balances.

4.2 It is hoped that the Authority will be successful in securing a Local Public Sector Agreement (LPSA2) grant. The outcome of the application will not be known until March 2010, but the best estimate is that this will total £1.023m split evenly between 2009/10 and 2010/11, with 50% allocated to revenue spending and 50% to capital spending. At this stage it is assumed that most of this reward would be added to the capital payments reserve (see para 11.1). Some of this grant (about £300,000) may be required to offset the cost of the scheme to install mobile data terminals (MDTs) in front-line vehicles. Further details will be reported to the Finance and General Purposes Committee next month.

5 Spending requirements from 2010/11

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

5.2 The base budget represents the full-year cost from 2010/11 onwards of carrying forward policies approved in the 2009/10 budget. The base budget figures have also been updated making the following assumptions:

· Pay awards of 1.0% for firefighters and support staff. This is a prudent assumption. It should not be taken as view on the desirability or likelihood of pay increases. Actual pay awards may well be lower. By way of example: a pay freeze, rather than a 1% increase, would reduce the impact on the budget by £400,000 in 2010/11 and £500,000 in subsequent years.

· Price inflation of 2.5%. Although the Retail Price Index is currently negative, the goods and services that the Service uses tends to have higher inflation levels.

· Increase of 0.5% in the cost of employer's contributions for the Local Government Pension Scheme and 1% for the Firefighters Pensions Schemes. The latter depends on a CLG announcement not expected until the new year.

· The costs of financing the existing capital programme.

· The full year effect of decisions taken in previous years' budgets.

· Revenue contributions to capital of £730,000 in 2010/11 to minimise the impact of unsupported borrowing

5.3 One change to the base budget has been made. This relates to the removal of some of the growth, previously approved, for replacing the `Gallet' helmets. Following safety testing on samples of our oldest helmets, the manufacturers have advised that replacement on the basis of age is unnecessary. In addition it is worth noting that, unusually, the effect of previous years' decisions and of full-year inflation on the 2010/11 budget are negative.

5.4 Overall, these assumptions increase the base budget by just 0.4% to a total of £66,925,000. This would not require any increase in council tax. Full details are set out in Appendix 1. Appendix 2 outlines the medium-term revenue base budget for 2010/11 to 2012/13.

6 Budget for retained firefighters

6.1 The budget for retained firefighters has previously been based on a formula using the rolling-average for the number of incidents attended. This worked well when the largest element of the budget was variable and driven directly by calls to incidents. However, the make up of this budget has been changing over recent years. Only about 20% of costs are now attributable to attendance at incidents. But there have been increases in other activities including: availability (on-call) payments, training, personal development and appraisal time and fire safety visits. Consequently, the formula is no longer fit for purpose. From now on it makes better sense to determine this budget, like most others, by forecasting overall changes in expenditure. The estimated budget for 2010/11 is £6,205,000, compared with the actual expected expenditure of £6,759,000 in 2009/10.

7 Unavoidable costs

7.1 There are currently no known unavoidable costs that cannot be contained within existing resources.

8 Growth pressures

8.1 It is usual practice to identify high priority growth pressures which might be supported in the forward budget. However, given the bleak financial outlook this exercise has not been carried out. But there is one relatively minor issue that needs to be addressed.

8.2 The proposed capital programme, which is set out in Appendix 3, would incur additional revenue costs of £10,000 in 2010/11, £48,000 in 2011/12 and £105,000 in 2012/13. However, these are less than the reduction in leasing costs resulting from the vehicles coming to the end of the agreements. So, overall, the revenue costs of acquiring vehicles is decreasing.

9 Emerging issues and risks

9.1 The following issues are difficult to quantify right now, but could prove significant. The strategy and draft budget makes no specific allowance for them at this stage.

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

· Regional Control Centre. There remains significant uncertainty about: (a) the Government's business case assumptions; (b) the possibility of additional transitional costs; and (c) and the potential cost of `out of scope' activities. The business case suggests that once fully implemented Hampshire will save £268,000 per year. It remains to be seen whether these can be delivered. In any event, it is assumed that the Authority would resist any attempt to transfer the value of its potential savings to another Authority that fares less well. For the time being it will be assumed that implementation will be cost neutral from 2012/13.

· Firelink. There is also uncertainty about the costs of the new radio communications system. We were originally told that the operating costs would be met in full by the department of Communities and Local Government up until the new Regional Control Centre goes live. Because of the delay to the project, there are indications that fire and rescue authorities will be charged with effect from the previous `go-live' date. No firm indication of costs has been received. There will certainly be additional fitting-out costs to install the Airwave radios in vehicles - it is understood these could be in the range of £3,000 to £7,000 per vehicle. These potential costs have not yet been built in to the strategy and draft budget.

10 Level of general reserves and balances

10.1 The Authority currently sets aside £1.6m as a general balance to meet unexpected expenditure. The detailed work to reassess the risks underlying this judgement is underway. At this stage an increase to £2m is being assumed. The proposed increase reflects the general level of uncertainty, the likelihood of reduced grant settlements, and the unpredictable nature of future inflation. Assuming this assumption is confirmed by more detailed analysis, the increase is likely to be achieved from anticipated underspendings in 2009/10.

11 Specific reserves

11.1 The Authority also holds specific reserves for expected future spending. Currently these are:

· Improvement and sustainability reserve. This is used to help deliver in-year value for money improvements and to pump-prime environmental initiatives. The expectation is that the level of the reserve will be largely maintained through recycling underspends achieved in the year as a result of the efficiency measures facilitated by its use. This reserve is expected to be at £926,000 by the end of 2009/10. A holding of £750,000 in this reserve is considered adequate. So the balance (£176,000) will be used to replenish the capital payments reserve.

· Equal pay reserve. This was set up in 2008 to meet the costs of implementing the equal pay review. Progress has been slower than originally anticipated and consequently £600,000 remains to cover any implementation costs attributable to years prior to 2009/10. It is hoped that agreement can be reached before the 31 March 2010, but it may slip into 2010/11. Once agreement has been reached an assessment can then be made of how much is left for reuse elsewhere. This could, for example, be set aside for bolstering the capital payments reserve.

· Capital payments and capital grants reserves. These provide more flexibility in funding capital programme priorities. Contributions to the capital payments reserve have been: £0.5m in 2008/09, £0.75m in 2008/09, but none in 2009/10. It is estimated that there will be no balance in the reserve at the end of 2009/10. It would be advantageous to return to a substantial balance in order to improve the Authority's ability to fund new major schemes - such as a replacement station building at Basingstoke. It might make sense to set aside some of the LPSA(2) reward grant. This would add to the reduction in the improvement and sustainability reserve (£176,000), and any unused equal pay reserve mentioned above. This could mean that up to £1m would be available between the two reserves to finance capital priorities.

12 Financial performance and efficiency strategy

12.1 The District Auditor, in his Draft Use of Resources assessment, stated that the Authority is performing well. The Authority has achieved `Level 3' in all elements of the assessment: financial reporting, financial management, financial standing, internal control, workforce planning, and value for money. This is expected to be as high a rating as any given to a fire and rescue authority.

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

· deliver the efficiency improvements required by Government targets,

· minimise the level of council tax, and

· maximise the scope for redirecting resources to implement the Authority's corporate objectives.

12.3 On the first point, it is pleasing to report that the required efficiencies (under CSR07) have already been exceeded. The Authority was required to make cashable savings of £1,055,000 in each of the three years from 2008/09 - 2010/11. Full details of this achievement will be brought to the January meeting of the Finance & General Purposes Committee. Additional efficiencies are likely to be identified once the budget is finalised.

12.4 The second and third points are dealt with in the context of options for specific levels of council tax.

13 Capital spending

13.1 The proposed capital programme for the three years 2010/11 to 2012/13 is set out in Appendix 3. This includes all existing commitments revised to reflect the latest estimate of costs at 2010/11 outturn prices, the details of which are set out below.

14 Vehicles

14.1 The vehicle replacement programme was presented to the Finance and General Purposes Committee in October 2009. The estimated costs (updated to 2010/11 outturn prices) have been assumed in preparing this draft budget.

14.2 In recent years revenue contributions have been set at £730,000. 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 helpful to maximise revenue contributions. It is therefore proposed that the current level of revenue contributions (£730,000) be maintained.

15 Asset management - buildings maintenance

15.1 Members have been aware of the need to address the backlog of building maintenance and have increased the capital programme to deal with this in recent years. That level of programme is maintained in the proposed budget so that the long term maintenance of stock remains on track. On that basis the proposed capital programme continues with a provision of £450,000 for major building repairs in each of the financial years 2010/11 - 2012/13.

16 Basingstoke fire station

16.1 Members may recall that there are particular problems with the main fabric of Basingstoke fire station. A feasibility report has been commissioned to assess options for a new building on the existing site. At this stage, because likely costs are not known, the scheme has not been specifically included in the capital programme other than £100,000 to cover feasibility work. A full scheme can be added to the 2013/14 capital programme once more information is available.

17 Capital financing

17.1 Taking into account the proposals outlined above it is proposed to finance the capital programme as follows:

* The capital allocations for 2011/12 onwards have not been announced at the time this report was prepared. For the purposes of budget planning it is assumed that the same level of allocation will be received from 2011/12 onwards as in 2010/11.

18 Options for Setting Council Tax for 2010/11

18.1 The analysis of base budget proposals set out above indicates that a council tax increase is not essential. This analysis includes the assumption that a £400,000 underspend will be achieved in 2009/10 and added to reserves rather than directly supporting the 2010/11 revenue budget.

18.2 The following years are expected to be much tougher. The scale of the challenge is likely to be more than can be tackled by selective savings measures applied across parts of the Service's operations. More radical measures will be required which seek to deliver services differently and with the aim of doing so both more effectively from the public's point of view and at lower cost. Some of proposed objectives set out in the draft corporate plan are measures of that type. They will form the foundation of the forward budget strategy.

18.3 Consideration should also be given to seeking to use the more flexible position of 2010/11 to place the Authority in the best possible position to face the more difficult years ahead. This can be enhanced by setting a level of council tax in 2010/11 that allows the potential to carry forward savings to 2011/12 onwards and / or allows for further contributions to be made to a capital reserves.

18.4 There is therefore a balance to be struck between the council tax level for 2010/11 and the need to prepare the Authority for more difficult times ahead. To assist Members in making that judgement, Appendices 5a - 5c show how 2010/11 and 2011/12 are expected to look given a 5% reduction in grant funding in 2011/12 and assuming three different levels of council tax increase for 2010/11: 0%, 1.5% and 3%. [Note: A 5% reduction is what some commentators have suggested is likely. It needs to be made clear, however, that this is purely illustrative at this stage in order to plan on as prudent a basis as possible]. It is recommended that members approve these three options as the basis for consultation with stakeholders' representatives at the meetings arranged for 14 January 2010. Alternatively, members could use the scenarios to determine other options for consultation.

18.5 In summary:

· A 3% council tax increase in 2010/11 would leave the Authority comfortably placed in 2011/12, with a 1.8% council tax increase enough to cover the position without any savings needed.

· A 1.5% council tax increase in 2010/11 would lead to a 4.8% council tax increase in 20011/12, or the need for £1.25m worth of savings(if a 1.5% council tax increase was to be repeated in 2011/12)

· No increase (0%) in council tax for 2010/11 would lead to a 7.9% council increase in 20011/12, or the need for £2.4m worth of savings (if a 1.5% council tax increase was to be repeated in 2011/12)

It is also worth noting that all three options could improve the Authority's position if savings are generated during 2010/11 and then carried forward. Appendix 4 suggests that at least £0.5m of savings could well be generated. Also, if the 2011/12 grant settlement is more favourable than the -5% anticipated, then this would also improve the position. Each 1% of grant funding is worth about £0.3m.

18.6 However, there is a strong likelihood of further grant reductions in future years. This assumption has not been factored in at this stage. But, clearly, the more savings that can be achieved in the next two years (2010/11 and 2011/2012), the easier it will be to maintain services at publicly acceptable levels of council tax in 2012/13 and onwards.

19 Council tax capping

19.1 The Government has reserve powers to cap local authorities proposing council taxes which it considers excessive. Given current and anticipated inflation levels it might be expected that the Government will expect council taxes to increase by no more than 3%, and perhaps less, in 2010/11.

20 State pension policy

20.1 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 (3.4%) for 2010/11 if the policy is to be continued. So, even the highest council tax increase option will continue to achieve this policy in 2010/11.

	Council tax increase (%)	State pension increase (%)
2008/09	3.9	3.9
2009/10	4.1	5.0
2010/11	3.4	2.5
Average	3.8	3.8

21 Savings proposals

21.1 The options set out above and in Appendix 5 need to be seen in the context of what savings might be made. Initial estimates of the potential budget savings are set out in Appendix 4. Consultation is still under way on the proposed corporate objectives, but it is reasonable to plan on the basis that at least some of them will be implemented. If, following consultation, the Authority decides not to approve those objectives that would generate savings, then alternative reductions in expenditure will need to be made.

21.2 The practical impact of some of the corporate plan proposals is to be to provide improved fire cover using fewer firefighters. Savings will be made from wholetime firefighters leaving and not being replaced. Based on expected turnover levels of about 20 firefighters per year, savings of £360,000 would be generated directly in 2010/11, rising to £1.08m in 2011/12 and £1.81m in 2012/13. This recruitment freeze will also generate temporary savings from not running trainees courses (£200,000 per full year of the recruitment freeze). There would also be some savings on the costs of uniforms and equipment for trainees (£39,000). Assuming that the savings are not used to support the 2010/11 budget but carried forward to 2011/12, then this could lead to some £2m of savings in 2011/12. This would bridge the 2011/12 gap under most of the financial scenarios currently envisaged. However, this might represent only a start towards what might be needed in subsequent years. There are some savings expected from the current review of the senior management structure and from the review of the retained duty system.

21.3 Appendix 4 illustrates, in very broad terms at this stage, how savings assumed in the proposed corporate objectives could enable the budget to be balanced at acceptable levels of council tax. This is purely speculative because the objectives are still the subject of consultation (which ends on 11 December). They might change. They are also subject to approval by the Authority at its next meeting in February 2010.

22 People impact assessment

22.1 The proposals in this report are considered compatible with the provisions of the European Convention on Human Rights and the Human Rights Act 1998 and the Race Relations (Amendment) Act 2000.

List of appendices

I:\Treasurers\Corporate Finance\Jane\Fire\Budget\Budget 2010 11\HFRA Draft Budget 2010 11 (2).doc