12(2)

North Somerset Council

REPORT TO THE Executive

Date of Meeting: 13th February 2007

Subject of Report: Revenue and Capital Budgets for 2007/08, and Financial Projections for 2008/09 and beyond

Town or parish: All

Officer/Member presenting: Mike Bell, Executive Member for Finance and Phil Hall, Director of Finance and Resources

Key Decision: Yes

RECOMMENDATIONS

That the Executive:

i. Considers the proposed Budget Amendments (as put forward at Council, see para 3.7 and Appendices 3 & 4), the comments of Policy and Scrutiny Panels (see elsewhere on the agenda) and the comments of the Director of Finance and Resources (see para 3.6)

ii. Approves the revenue and capital budgets for 2007/08 (as set out in Appendices 5 – 9 and summarised in Appendix 2), including special expenses, and the use of reserves, and refers the budgets to Council for approval.

iii. Recommends to Council a Council Tax rise of 3% in respect of North Somerset Council services.

iv. Notes the likely increases in the Fire Authority, Police and Town and Parish Council precepts, which give rise to an overall average Council Tax increase of 3.34%, at the time of writing.

v. Notes the financial projections for 2008/09 and beyond, and refers this aspect of the report to the Finance and Performance Scrutiny Panel for their comments, as part of their contribution to the ongoing budget process.

vi. Requests that Council, following the Council election in May 2007, instructs the Executive to consider its financial strategy at the earliest opportunity in order that a medium term financial plan, which provides a sustainable budget, can be developed.

vii. Recommends that Council approve the list of the Council’s Prudential Indicators for 2007/08, 2008/09 and 2009/10.

viii. Recommends that Council approve the Investment and Treasury Management Strategy (ITMS) for 2007/08.

1. Summary of Report

The report provides an update on the draft revenue and capital budgets for 2007/08 since the Executive meeting on 19^th December 2006, following the latest round of scrutiny and further clarification on the risks and uncertainties highlighted in the previous report, and invites the Executive to determine its final budget for recommendation to Council for approval. The report outlines the expected precepts of the other bodies and the effect on the Council Tax bill of the North Somerset resident.

In addition, the report considers initial projections for the following two financial years and highlights the financial challenges facing the Council in the medium term.

2. Policy

The Council’s budget should ensure that resources are planned, aligned and managed effectively to achieve the corporate aims and objectives of the Authority.

3. DETAILS

3.1 Introduction

The Executive approved its draft revenue and capital budget at its meeting of the 19^th December 2006. At that stage, the Budget assumed a council tax increase of 4%, but contained a general contingency sum of £339,000 which was to be held against a number of risks and uncertainties which were still to be fully assessed and valued.

At the time of the report, the major uncertainties were enforcement of government legislation which would adversely affect land charges income (£300,000 was included within the draft budget for this item), the staff pay award, and the financial liability of the concessionary fares scheme which introduced free travel for senior citizens from 1^st April 2006.

Not withstanding this, the Executive committed to achieving a Council tax of less than 4%, if possible.

3.2 Changes since the Executive 19^th December 2006

To allow all members to consider any new or amended financial information, officers, for the first time, produced two budget update information sheets. These sheets were intended to keep all members informed, and allow for timely alternative budgets to be presented, if desired. The two budget updates were issued on the 12^th and 26^th January 2007, and the major changes contained within them are summarised below:

Budget Update 1

	£’000
Removal of general contingency item	-339
Increase in projected collection fund surplus	-80
Adjustment of contingency in respect of decrease in Land Charge Fee Income	-22
Shortfall in Social Services employment costs	30
Deferral of withdrawal from the LGA (Council to give 12 months’ notice of withdrawal)	60
Additional grant income to support smoke free legislation	-49
Amended contingency sum as at 12^th January 2007	400

Budget Update 2

	£’000
Removal of general contingency item shown at 12^th January 2007	-400
Removal of base budget surplus in D&E – single status	-95
Transfer of central support costs to General Fund from DSB	90
PPP – withdrawal of staff incentive scheme	-14
Reduction in ECU saving for 2007/08 only	60
Reduction in green travel plan investment for 2007/08 only	-35
Increase in vacancy management for 2007/08 only	-25
Amended contingency sum as at 26^th January 2007	419

From the table above, it can be seen that at 26^th January, assuming a council tax increase of 4%, the budget contained a general contingency of £419,000, which represents 0.54% in council tax.

3.3 The National Picture

On 22^nd January 2007, the Local Government Association announced the results of their initial survey into likely budgets and Council Tax increases for 2007/08. The survey of 132 local authorities revealed that ‘Councils with the responsibility of caring for the elderly are facing intense pressures from both the increasing number of elderly people needing care and the knock-on effects of the NHS deficit crisis which has left many councils picking up the cost of care. Recent figures found that almost seven out of ten authorities can now only afford to provide care to people with the most substantial and critical needs.’

The survey found that the average proposed Council Tax rise for those councils with the responsibility for social services and caring for the elderly is set to be 3.9%, whereas the average for those councils without the above responsibility is set to be 3.1%.

In finalising the overall grant to local government and confirming figures originally published with last year’s financial settlement in January 2006, Local Government Minister Phil Woolas said that ‘the new multi-year settlements provided local authorities with a stable and predictable funding base. In line with this, it had always been clear that the settlement for 2007-08 - second year of a multi-year settlement - would not be changed from that previously published for consultation on 28 November 2006 except in exceptional circumstances. No such exceptional circumstances had been found in the representations he had received.’

He warned local authorities there was no excuse for excessive council tax increases:

“This brings the total increase in money from Government to local authorities including schools to 39 per cent in real terms from 1997 to 2007-2008. Given this substantial investment, we expect again to see the council tax increase in England below 5 per cent. As in previous years, we are prepared to take capping action to deal with excessive increases. No authority should be complacent about the Government's resolve in this matter - this includes requiring authorities to re-bill if that proves necessary.”

3.4 The Financial Landscape 2008/09 and beyond

Throughout the budget process, key financial and operational risks facing the council have been highlighted in the various reports. Almost without exception, these risks are ongoing and are likely to apply even greater pressure upon the budget in future years.

Appendix 1 shows initial projections for 2008/09 and 2009/10. At this early stage, it is envisaged that to achieve a council tax rise of 5%, savings of £3.4million will be required in 2008/09, with further savings of £0.8million required for each 1% reduction in the level of council tax rise.

However, this sum perhaps only portrays part of the picture. The Comprehensive Spending Review 2007 will have been undertaken by the Government. This review is an in-depth examination of Government spending priorities, to establish long-term aims and objectives for each Government department linked to public expenditure and performance management frameworks. CSR 2007 will cover spending for 2008-2011 and is the second comprehensive review, following the first CSR in 1997. Early indications suggest that the review will look to build upon the value for money and efficiency programmes already in place, and therefore, any growth in general grant received from Government is unlikely.

Further, the budget paper presented to the Executive in December, noted that this year’s budget had taken the opportunity to utilise government grant to cover staffing costs previously funded by the council. As part of the spending review, all Children and Young People grant streams will be re-assessed. Any change to current arrangements could have an adverse effect upon the budget.

The projected figures include additional annual growth of 1% per annum in respect of employers contributions to pension costs. Following the previous triennial valuation, annual contributions were increased annually by 1.9%.

Current estimates suggest that in 2009/10, the Council will be required to purchase Landfill Allowance Trading scheme permits, or incur fines. Whilst officers continue to develop alternative methods to cope with the current levels of waste, the projections include an initial growth item of £1.663million for the purchase of permits in 2009/10.

It is clear from the few specific items highlighted above, that in the medium term, difficult decisions will have to be taken by the Council if it is to achieve a sustainable budget, but also provide a budget which is affordable for its council tax payers. It is therefore recommended that following the Council election in May 2007, Council instructs the Executive to consider its financial strategy at the earliest opportunity in order that a medium term financial plan, which provides a sustainable budget, can be developed.

3.5 Risks and Uncertainties - Update

At this stage in the budget process, two major uncertainties remain unresolved:

Concessionary Fares – the latest information available is presented in the table below. Members will note that the draft budget represents the mid point but that a variance of +/- £400,000 remains, subject to the outcome of the three variables; the number of journeys, fare price increases, and the reimbursement factor.

Pay awards – The draft budget contains an inflationary amount of 2.5% for pay awards. Members may be aware that Unison has announced that their pay claim for 2007/08 is 5% or £1,000, whichever is the greater, as well as an increase of one day in basic annual leave and a reduction in the standard working week to 35 hours, without loss of pay. In addition, the Retail Price index latest annual figure is running at 4.4%. Clearly, any movement above the assumptions made in the draft budget will have a significant effect on the budget. Again, resolution of this issue will not be known at the time of budget setting. If the pay award is settled above the budget figure, there is a cost to the Council of £100,000 for every 0.25% above the budgeted increase of 2.5%.

In the event that these uncertainties do adversely affect the budget position in the new year, or that some of the risks highlighted in the risks and robustness statements have an adverse effect on the budget, then temporary use of reserves will be required to balance the in year position. However, given non-earmarked reserves are now estimated to be at the recommended level of £7million, any use within the next year will require replenishment in the following year.

3.6 Comments of the Director of Finance and Resources

The Local Government Act 2003 requires me as statutory s151 Officer to report to Council on the robustness of estimates and adequacy of reserves.

My advice on these issues is informed by individual assessments undertaken and signed by each Director (which are available as background papers). My advice is set out below:

a) That members can be assured that the budget process was sufficiently robust. In informing this advice I have taken into account the following:

· The process started in early 2006 and has successfully engaged all directorates and service as well as finance officers; all deadlines were successfully achieved;

· Proposed budget changes have been informed by council priorities, underlying spending profiles, potential efficiency improvements and volume and price considerations. Highly volatile items (eg waste tonnages, care in the community) were reviewed in detail at more than one stage of the process;

· The budget principles and budget strategy adopted by the Executive were helpful in guiding the budget process;

· All reserves have been reviewed and changes made to reflect continuing need.

b) That, notwithstanding the robustness of the process, a number of risks and uncertainties remain which were set out in the draft budget report and updated in para 3.5 above. Given the degree of outstanding risk, notably in respect of pay awards, my advice is that it would be prudent to retain an element of contingency within the final budget. If this is not done then there is a higher risk of in-year overspend and it will be essential for non-earmarked reserves to be retained at least at the recommended level.

c) Having considered the risks to which the Council’s budget is exposed, my advice is that the Council should maintain a prudent level of General Fund non-earmarked revenue reserves (excluding schools) of £7M. This is unchanged from last year. The key risks considered to be affecting the budget are:

· Demand for care-in-the-community placements and children’s special educational needs support	· Fluctuations in waste tonnages
· Recruitment and retention of specialist foster care	· Movements in interest rates
· Changes in healthcare provision and funding	· Requirements of new legislation (notably in childcare)
· Pace of change on home care reprovision	· Potential loss of income from North Somerset Housing
· Concessionary fares	· Unforeseen Health and safety requirements
· Adverse weather conditions

d) The Council’s current level of non-earmarked revenue reserves are (see Appendix 9) in excess of the recommended level. There is an option, therefore, to reduce to this level and use the released sum to reduce the required increase in Council Tax. In considering this members should be aware that reserves can only be used once and if applied to finance expenditure that is ongoing then the resultant budget will be unsustainable financially. At a Council Tax rise of 3% the use of reserves will be around £800,000 which is equivalent to around 1% on Council Tax. My concern is that such use of reserves is unsustainable and, given the outlook for future years (see Para 3.4 above), it will add to the financial difficulty faced by the Council in 2008/09.

3.7 The Executive’s Consideration of the Budget and Final Proposal

The Executive have noted the strong public reaction to the above-inflation increases in Council Tax in recent years. They also note with concern the issues around the affordability of Council Tax for those on low and fixed incomes and look forward to the results of the Lyons review on system reform.

Against this backdrop, the Executive’s view is that the priority in finalising the budget should be to reduce the proposed increase in Council Tax. In approving a draft budget based on a notional Council Tax rise of 4%, the Executive agreed to seek to reduce the scale of increase if possible.

The Executive now recommends to Council an increase of 3%.

The level of non-earmarked reserves has increased in the last three years as a result of windfall receipts and surpluses in the general fund. As a result the Executive believes that a contribution from reserves towards reducing the Council Tax rise is appropriate and affordable. The Executive recognises that such a use of reserves can only be a one-off and it remains committed to maintaining a prudent level of reserves and to seeking long-term savings and efficiencies to achieve balanced budgets.

The Executive note that risks and uncertainties remain but are confident of the ability of the Council to take mitigating actions should they prove necessary, particularly in the light of the general robustness of the budget setting process.

While some of the suggested budget amendments and panel recommendations for growth or reinstated savings are of merit, the Executive considers that the need to achieve an affordable rise in council tax is of greater importance. The only exception to this is to include an additional £9,000 in the base budget as recommended by the Health Scrutiny Panel to support sub-regional health scrutiny working – a cost which is already being incurred.

The proposed Council Tax rise is achieved by:

	£’000
Delete contingency	-419
Add Health Scrutiny – sub-regional health scrutiny	+9
Reduce support from non-earmarked reserves to capital programme (see para 3.9 below) and use to reduce Collection Fund requirement	-373