Meeting documents

Purpose of the Report
1 The purpose of the report is to -
· Propose a process and an outline timetable for the production of the 2009/10 Budget and the Medium Term Financial Plan (MTFP) for 2010/11 - 2011/12 for the new Unitary Authority.
· To provide a framework to help prepare the MTFP for the new Unitary Authority
· Establish the budget strategy for the new Unitary Authority.
· Propose the framework for budget monitoring through 2008/09 and for forecasting the 2008/09 outturn for the County Council.

Background

2 The County Council and the District Councils have well established MTFP processes, taking a view of the revenue account and capital budget. Appendix 2 shows extracts of the County Council’s MTFP. In 2008 the County Council and the District Councils received a three year financial settlement from Government and this will enable more detailed planning to be undertaken. In summary the County Council expects formula grant increases of 4.8% in 2009/10 and 4.1% in 2010/11. District Council increases for these two years average at less than 0.5%.

3 A timetable needs to be agreed for the production of the revenue and capital budgets and the MTFP taking into account: · The creation of the new Unitary Council, and estimates included in the “Bid Document” prepared by the County Council and accepted by Government.
· A review of Council priorities.
· The targets of the Local Area Agreement.
· A review of progress during the current year.
· Member decision making and scrutiny.
· Consultation requirements.
· Government announcements.
· Annual Efficiency Statements (as a successor to the Gershon regime).
· Comprehensive Performance Assessment Framework (CPA).
· An analysis of the risks involved.

4 Given this will be the first budget for the new Unitary Authority and will need to be developed using the resources and staff of the County and District Councils the process will need to be carefully defined and the basic budget strategy agreed. This basic strategy will inevitably be refined as the process develops. Budget and MTFP

(A) Process

5 A proposed detailed timetable is shown in Appendix 3.

6 It is proposed that the Budget and MTFP will be managed through the structures of the existing County Council:
· The Cabinet will provide strategic direction and make decisions.
· The Budget and MTFP will initially be prepared using the document issued for consultation on the Proposed Senior Management Structure following Member workshops earlier in the summer. As structures are firmed up, appropriate adjustments will be required so that the final budget can be aligned to services for monitoring purposes.

	·	Chief Officers will be allocated the lead role for each Directorate as proxies for the Corporate Directors expected to be appointed in the autumn. Where appropriate additional support will be provided.
	·	Chief Officers will submit proposals for consideration based on information from County and Districts about Service pressures and opportunities for savings informed by the work of the LGR workstreams and in the knowledge of the need to achieve the commitments in the bid. ·

· The complexity of aligning district functions into this process needs to be taken into account. Each existing County Council service will be allocated at least one senior district finance officer to co-ordinate the information coming from districts and ensure that information is both complete and consistent. They will also support County staff with the production of service and corporate budgets.
· This structure is shown below:

Service	Responsible Chief Officer	County Finance Lead	District Finance Staff	Related LGR Work stream
Adults - including well being and health	Rachael Shimmin	Jeff Garfoot	Dave Watson Ian Herberson	Adults, Wellbeing and Health Programme Board
Childrens and Young Peoples Services	David Williams	Phil Barclay	Dave Watson Ian Herberson	Children’s and Young People
Development	Roger Elphick } Janet Johnson }	} } Neville } Noble } } }	Stuart Reid Dave Temple	Environment and Neighbourhoods Programme Board & Place Shaping Programme Board
Neighbourhood Services	John Richardson } Mike Clark }
Corporate Resources including Assistant Chief Executive	Stuart Crowe	Tony Hope	Paul Darby Joanne Kellett	Internal Challenge, Corporate Support Programme Board

· The Budget will be coordinated through the County Council’s central accounting function led by Hilary Appleton. Recognising the complexity of this year’s process, a senior District finance officer, Alan Smith, will ensure that District services and functions are appropriately reflected in the consolidated budget.
· This framework will require the creation of a virtual joint County/ District finance team to carry out the budget process.

7 The process will apply to both Revenue and Capital expenditure proposals. However, in respect of capital, additional steps will be necessary to consider an over-arching property strategy and “ranking” or “scoring” to identify priority projects.
8 Cabinet will be asked to consider issues on which they will engage in consultation. Overview and Scrutiny will determine their own workplan and will work in parallel with Cabinet so that Cabinet can be informed of Overview and Scrutiny views as decisions are made. After consultation Cabinet will reflect on responses and recommend final proposals for full Council.

(B) Strategy

9 The Strategy will need to take into account the following issues.

10 In January 2008 the Government confirmed the funding for the existing eight Authorities in County Durham for the period 2008/09 to 2010/11. We have assumed that funding will increase in 2011/12 by 2% but that we will also lose the “Being in Business” element of the grant relating to the former District Councils of £2.3m in that year.

11 We need to be mindful of proposals made by the County Council in the Bid Document and the estimates for savings, investments and transitional costs.

12 We need to be mindful of the Government’s approach to capping. The Government is likely to publish a ‘Notional Amount’ for the new Council against which increases in council tax will be measured.

13 We have maintained the County Council’s planning assumption for Council Tax increases of 5%, although as detail is refined this is likely to change. Each 1% change in Council Tax is worth around £1.9m to the new Authority.

14 We have assumed that the Collection fund generates a surplus of between £2.0m and £2.4m. We have assumed that the Council Tax base continues to rise at this stage, but the current financial climate may impact upon this assumption, and for the purposes of the Council Tax Base, we will assume a 99% collection rate.

15 We have reviewed the base budget increasing it for inflation on Staff Costs and general prices by 2.5%. This acknowledges that within services there will be elements which have higher and lower percentage increases in prices. Services will be expected to accommodate all but the most significant increases due to inflation which will need to be dealt with as ‘separate additional items for inflation’ (over the general 2.5%) in the calculation of the base budget. We have also built in known changes to the base.

16 As a common pension contribution rate is applied across all former District and County staff, overall costs will not increase over and above the anticipated cost of the ‘stepped’ actuarial increases. However, services will be affected differently as costs associated with former District staff will fall and those associated with former County staff will rise as rates are equalised.

17 We have factored in the investments required by the County Council’s existing MTFP and will need to recognise additional pressures and District service changes. The key pressure identified is in waste disposal where £6m is added into the base in 2010/11 and a further £6m in 2011/12.

18 The Authority will need, for the first time, to agree a Housing Revenue Account and Housing Capital Budget for 2009/10. The issues around aggregations add some complexity to the production of the necessary information. Discussions are ongoing with CLG around a number of options that could be pursued and members will be kept appraised of developments. Once final arrangements are known, then these will be factored into the detailed budget timetable. The production of a Housing Revenue Account will impact on the General Fund Budget position in terms of staffing recharge, ground maintenance and cost of debt. Information requirements will be co-ordinated as part of the neighbourhood services work programme.

19 This work is still at a very high level and will change as more analysis is done over the next few months but it is useful to help understand the scale of our challenge. In simple terms the table below suggests that we will need to find savings in the region of £12m in the first year rising to £13m in the second year and £16m in the last year of the MTFP. This equates to savings of between 3% and 4% in each year. * An extract from the Bid Document is attached at Appendix 4
** The Band D % Increase in 2009/10 is a 5% increase but on the lower value of all the districts Band D’s equalised to Easington’s level at 31/3/08. The “loss” or cost of this equalisation is £3.234m in 2009/10

20 Some Councils have over recent years supported their base budgets from reserves. This is not sustainable in the long run. The new Council will have to decide to what extent this issue is redressed in the first year. The base has been adjusted to assume that all spend is funded by external resources and, where appropriate, earmarked reserves.

21 We have also assumed that where earmarked reserves have been used in the past, spending will stop when the reserve is utilised.

22 Any Reward Grant available to the Council following achievement of Partnership targets will need to be considered. The treatment of Area Based Grants will need to be reviewed.

23 The Council may wish, over the period of MTFP, to move to a “Resource allocation” budget process which will be focussed on a priority driven agenda and be designed to give greater flexibility between years.

24 Our approach to identifying savings is outlined in our strategic and financial planning cycle. This is supported by:
· Scrutiny of the Budget and MTFP via Corporate Management Team, Cabinet, Overview and Scrutiny and external consultation.
· Challenge through areas such as Best Value Performance Indicator and Key Performance Indicator analysis, audit commission profiles and external inspections.
· Efficiency and Improvement Steering Group which coordinates our efficiency programme, procurement and other business process reengineering projects.
· Management of the Council’s property through the asset management plan.

25 The Unitary Submission has identified savings of £13.8m for 2009/10 and a further £6.8m for 2010/11. In the period of the MTFP these savings will be needed to deliver the new investments (£15.2m) and transition costs (£12.5m). The pay back period of 2.79 years detailed in the bid effectively uses up the savings in the medium term.

However, initially Reserves will be used to meet the transition costs and the council need to consider the extent to which those reserves are replenished. As part of the Budget and Medium Term Financial Plan, the Reserves Policy of the existing Council will need to be reviewed to reflect the risks facing the new Authority.

26 The successor to the Gershon review also expects the County Council to achieve 3% efficiency savings on average in each of the 3 years of CSR07 in addition to any LGR savings. This would deliver approximately £13m per annum (excluding schools).

27 In addition, changes in demand-led services, the impact of any standardising of service levels across the new authority, changes in statutory requirements and the aspirations of the new Council need to be factored into the equation.

28 Consequently it would seem from this initial review that savings of at least 3% per annum will be required in each of the three years of the MTFP.

29 Last year, in-year savings were identified and Members sought schemes which could be introduced which would not have long term demands on resources. A number of proposals were agreed but it was not possible to implement them in year. It is suggested that, during the budget process, thought be given to the approval of a list of projects which could be released should Members determine, and if resources become available during the year.

30 It is important that the risks involved in establishing a new council’s budget are appreciated and considered. We are already aware of a number of risks facing the existing County Council from a finance point of view. Districts’ risks will need to be added to these. These will then be overlayered with the financial risks associated with bringing eight organisations together. Members will need to bring together these and other issues - such as the national economic climate as the MTFP develops, and make decisions appropriately.

31 Taking into account the information outlined above it is suggested that the new Unitary Council develops its Budget strategy around the following key assumptions:
· Investments / Growth should be kept to a minimum, defending service provision, not expanding on it.
· Council Tax rises be modelled at 5% with an underlying assumption that the minimum level of increase should be 3%.
· Housing issues, including decisions around the production of a Housing Revenue Account and Housing Capital, will be factored in at appropriate times.
· Fees and Charges should be agreed at levels delivering at least the same level of income as currently generated.
· Savings are focussed on efficiencies, not service cuts.
· Reserves should be used flexibly to facilitate a smoothing of the impact of changes.
· All services to supply realistic, achievable savings proposals of 3% of their net budgets.
· Savings will be identified as efficiency or service cuts on the assumption that all proposals with minimal impact on front line services will be taken.
· All services to supply additional savings of a further 2% of their net budgets to allow Members the opportunity to vary the impact of savings and target under spends towards priorities.
· Efficiency savings where identified, will be taken first on support service areas whether they sit within Service delivery areas or within Corporate Resources, although savings will reflect the proposed consolidation of support services.
· Services should develop proposals which could utilise in year savings should they arise. (These proposals should be capable of being introduced quickly but must not have long-term consequences).

32 Approximate savings targets by service would equate to:

Savings Targets by Service £000s	3% Target	5% Target
Children and Young People’s	2,600	4,300
Adult and Community Services including well being and health	5,000	8,400
Development } Neighbourhood Services }	3,700	6,100
Corporate Services (incl. Chief Execs and Treasurers)	2,000	3,500
Total	13,300	22,300

NB These figures will need to be revalidated as the process develops but they usefully give an indication of the scale of the savings required.

Capital

33 It is anticipated that the development of the capital programme will follow the same process as for revenue except that all proposals will go through the Asset Management process.

34 The first stage in the process is the development of the Capital Strategy for the new Authority - this extends beyond property into all forms of capital asset.

35 It needs to be recognised that investment in assets, particularly property, is a long-term project and the Council may need to establish a short and medium to long term approach to this issue.

36 Resources for the Capital Programme will need to be carefully considered, particularly in the current financial climate when capital receipts may be less than originally envisaged.

(C) Timetable

37 The following proposals are summarised in Appendix 3.

38 Priorities will be outlined as part of the LGR process during July/August.

39 Consultation on priorities during early September.

40 In early October, there will need to be a joint discussion between Cabinet and officers on the broad principles emerging, to jointly understand and agree base budgets, savings and investment proposals for the MTFP.

41 Base budget and savings and investment proposals for consultation for the MTFP agreed with Cabinet during October.

42 Fees and Charges to be consolidated and standardised, where appropriate, during October.

43 Consultation on the budget year with key stakeholders, local people and businesses on detailed proposals during November in line with last years “Your Council Your Say” process. This reflects the need to consult on proposals before setting the budget, and ensures that the budget is based on robust estimates.

44 The consultation will be reflected upon and details finalised in terms of growth, savings and resources. This work will take place in December and January.

45 During January and early February Cabinet will take final decisions, informed by the views of consultees and the final grant settlement. In early January, again, it will be useful to have a joint discussion between Cabinet and officers before final decisions are framed.

46 It is proposed that at regular intervals through the budget process, “Budget Briefings” will continue to take place between Portfolio Holders (Resources and Services), Overview and Scrutiny, Service Directors and the County Treasurer.

47 In addition, Overview and Scrutiny Committee will need to programme its approach around this timetable. Any further requirements will need to be factored into the timetable. The County Treasurer will work closely with Scrutiny to help meet their needs.

48 As usual the process needs some degree of flexibility to reflect such things as Government announcements being later than expected. Nevertheless previous experience has proved the value of agreeing a timetable at this stage which can, if necessary, be subject to change.

Budget Monitoring through 2008/09

49 The revenue and capital budget will be monitored on a monthly basis (excepting April) by each of the services and reviewed centrally by the County Treasurer and reported to Corporate Management Team (CMT).

50 Reports will be presented to CMT and Cabinet on a quarterly basis for the year to June, September, November (this is a two month period but facilitates the incorporation of this revised estimate into the budget process) and March. These reports will provide a full analysis of the following items:

§ Balanced Scorecard and Key Performance indicators;
§ Efficiency;
§ Revenue budget;
§ Capital budget;
§ Balance sheet and cash flow;
§ Savings identified in 2008/09 budget;
§ Contingencies;
§ Prudential Code;
§ Treasury Management;
§ Risk Management.

51 In addition a report will be provided by each District detailing key issues in their budget and highlighting any key variances and their forecast impact on the District’s reserves at year end.

52 At the quarter end of September and November revised estimates of outturn will also be reported to Cabinet. Budget revisions will not take place at any other time during 2008/09.

53 In line with the Constitution, as part of this process we will also be seeking approval for the use of unspecified contingencies. This will be necessary to approve spending on items not specifically provided for in the detailed budget.

54 These reports will continue to be subject to a “Budget Briefing” review which will take place after Cabinet to enable all Members of the Authority the opportunity to have a full explanation of financial and non financial performance of the Council.

Recommendation

55 It is recommended that:

§ the budget strategy for revenue as outlined in paragraph 31 is agreed;
§ the budget strategy for capital as outlined in paragraphs 33-36 is agreed;
§ the proposed work programme and timetable for budget preparation and reporting outlined in Appendix 3 is agreed;
§ the need to work cohesively and flexibly in the budget process across the former County and District structures is noted and welcomed.

Contact: Stuart Crowe Tel: 0191 383 3550

30th July 2008
p/r/ha10-08

Appendix 1: Implications

Finance
Local Government Reorganisation
(Does the decision impact upon a future Unitary Council?)

Details the strategy and timetable for the Unitary Council’s budget .

Finance

No direct consequences, but provides the basis for decisions on the Budget for 2009/10 and the Medium Term Financial Plan.

Staffing

None

Equality and Diversity

None

Accommodation

None

Crime and disorder

None

Sustainability

None

Human rights

None

Localities and Rurality

None

Young people

None

Consultation

The budget process comes under closer scrutiny each year and time needs too be made available to consult widely on all proposals.

Health

No

18

Appendix 2: Medium Term Financial Plan (extract from Budget Book)

Basis of the Preparation of the MTFP 2008/09 - 2010/11

Base Budget

Introduction

1 The County Council is expecting Parliamentary Consent for the replacement of the current Council and the 7 District Councils with a new ‘Unitary Council’ from April 2009. It is also expected that in May 2008 elections will be held so that a transitional authority of 126 Members can be established. This new elected body will undertake the detailed financial planning for the new unitary authority for 2009/10 and 2010/11. The approach in this report is to project spending at a high level into 2009/10 and 2010/11 on the basis of on-going County Services. When the new Council begins to meet, after May this year, it will need to turn its attention to producing a more detailed Medium Term Plan bringing together the work of the 8 existing councils and taking into account the proposals set out by the County Council in its submission to Government to create one unitary council for County Durham.

2 The Base budget has been reviewed and uplifted for the following items:

	2008/9	2009/10	2010/11
	%	%	%
Price inflation	2.0	2.3	2.3
Salary and cost inflation	2.5	2.5	2.5
Pensions contributions increase	5.0	4.5	4.5

Resources

3 The details of the Local Government Finance settlement are outlined in Section D. The settlement is for a three-year period. On that basis we have forecast, as part of our MTFP, increases in grant of 4.8% for 2009/10 and 4.1%for 2010/11.

4 Specific Government Grants have been budgeted at a net nil impact on this budget assuming that all grants received in year will be spent in year. This impact will be shown gross to reveal the full impact on income and costs.

5 The Dedicated Schools Grant (DSG) is a specific grant and must be spent entirely on schools related expenditure.

6 Area Based Grant, with the exception of the ‘top slice’ referred to in Section E have been included as a separate income line and appropriate expenditure included in services.

7 The Collection Fund (the excess Council Tax collected by the Districts over that which they had budgeted to collect) has a surplus of £1.917m in 2008/09 and is assumed to have a surplus of £1.0m thereafter.

8 Reserves levels have been reviewed in accordance with the Reserves Policy agreed by the County Council in February 2006.

9 Council Tax increases of 5% have been used in our Medium Term Planning arrangements. This report is based on a 2.9% increase levied in 2008/09 and that 5% continues to be the planning assumption for subsequent years.

Investment

10 The investment proposals are detailed in Annex G1 and summarised below:

Service	2008/09	2009/10	2010/11
Adult and Community Services	4,700	4,500	4,500
Children and Young People’s Services	1,796	350	1,000
Environment	2,160	1,774	6,000
Chief Executives	0	0	0
Corporate Services	0	0	0
County Treasurers	0	0	0
Service Direct	0	0	0
TOTAL	8,656	6,624	11,500

11 The significant investments in 2008/09 are:

Adults and Community Services:

· Supporting People with Learning Disabilities

· Reduction in Grants

· Day Service Improvement

Children and Young Peoples Service

· Direct Payments

· Transport for Looked After Children

· University Allowances

· National Minimum Fostering Allowance

· Youth Service

· Community Centres

12 Major investments in 2008/09 and 2009/10 are likely to be in Adult and Community Services and in Environment Service (relating to Waste).

Savings

13 The savings proposals are detailed in Annex G2 and summarised below:

Service	2008/09	2009/10	2010/11
Adult & Community Services	6,609	370	0
Children & Young People’s Services	2,206	1,083	0
Environment	512	251	0
Chief Executives	128	33	0
Corporate Services	243	91	0
County Treasurers	445	175	0
Service Direct	0	0	0
Other	0	0	0
Total per Annex G2	6,143	2,003	0
Savings not yet identified		3,046	12,914
TOTAL	6,143	5,049	12,914

14 Detailed proposals for the majority of savings for 2009/10 and 2010/11 have yet to be identified. Services will be asked to review options and bring back proposals to Members in the coming months.

MTFP Summary

15 The above assumptions and information above lead us to a MTFP summary as outlined below:

	Analysis of available resources £000s	2008/09	2009/10	2010/11	Calculation
A	Government grant increase	20,889	7,615	6,864
B	Area based grant	27,380	17,193	-375
C	Council Tax increase (2.9% 2008/09, 5% thereafter) including changes to council tax base	6,496	7,856	8,257
D	Changes in Reserves	9,685	-21,181	-135
E	Surplus on Collection Fund	58	-917	0
F	Total increase in available resources	64,508	10,566	14,611	A+B+C+D+E
	Impact of spending and savings
G	Increases in base budget	-24,846	8,202	-16,400
H	Grants into base budget	-37,149	-17,193	375
I	Net resources available	2,513	1,575	-1,414	F+G+H
J	Possible savings	6,143	2,003	0
K	Total amount available for investment	8,656	3,578	-1,414	I+J
L	Investment options	-8,656	-6,624	-11,500
M	Surplus / Deficit (-)	0	-3,046	-12,914	K+L

Financial Reserves

16 The current strategy for the Council is based on the premise that for the period of the Medium Term Financial Plan general reserves will stay broadly within the reserves policy.

17 Reserves are held as:-

· A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing - this forms part of general reserves.
· A contingency to cushion the impact of unexpected events or emergencies - this also forms part of general reserves.
· A means of building up funds, often referred to as earmarked reserves, to meet known or predicted liabilities.

18 However, it would be inefficient to build up excessive reserves. The current policy is that the County Council will:

· Set aside sufficient sums in earmarked reserves as it considers prudent to do so.
· Aim to maintain, broadly, general reserves of around 4.5% of the budget requirement or about £16m.

19 In accordance with the Council’s policy on reserves, with the exception of those held by schools over which the County Council has no control, each reserve has been reviewed.


20 The following table shows the estimated movement in financial reserves:

Financial Reserves	Balance at 31.3.2007	Variation 2007/08	Estimated Balance at 31.3.2008	Variation 2008/09	Estimated Balance at 31.3.2009	Variation 2009/10	Estimated Balance at 31.3.2010	Variation 2010/11	Estimated Balance at 31.3.2011
	£000	£000	£000	£000	£000	£000	£000	£000	£000
Unearmarked	11,814	1,566	13,380	496	13,876	0	13,876	0	13,876
Earmarked	47,695	4,000	51,695	-15,094	36,601	-1,038	35,563	-903	34,660
County Council Reserves	59,509	5,566	65,075	-14,598	50,477	-1,038	49,439	-903	48,536
Schools’ Balances	21,215	-	21,215	-7,621	13,594	-	13,594	-	13,594
Total Reserves	80,724	5,566	86,290	-22,219	64,071	-1,038	63,033	-903	62,130

Value for Money

21 It is important that the Council delivers value for money as it spends public funds. Across the Authority various mechanisms are used to test value for money and within each Service report in Section I, a section on value for money will be found.

Risk

22 The Council is paying increasing attention to the risk management process across the Authority.

23 In our budget setting process a number of specific risks have been identified which we believe can be managed using contingencies and reserves.

	Description
Equal Pay/ Job Evaluation	Costs may be higher than anticipated
Inflation	Only 2.0% provided in 2008/09 - costs may be greater.
Waste	Volumes may be higher than anticipated and the contract for Waste Disposal is under review.
Property	The Government’s Building Schools for the Future initiative may require further investment in both revenue and capital before precise costs and plans are determined. Further ‘waves’ are planned.
LGR	There may be additional costs over and above those which have been forecast. There may be staffing issues to address.

Minimum Revenue Provision (MRP)

24 Draft Communities and Local Government (CLG) regulations are currently issued for comment which, if implemented, will require full Council to approve a Minimum Revenue Provision (MRP) Policy Statement in advance of each financial year. MRP is the amount that must be charged to revenue each year for the repayment of debt.

25 It is possible that these regulations will come into force before 31st March 2008, and will therefore be effective from 2007/08. Whilst the regulations will revoke current MRP requirements and replace them with more flexible statutory guidance, councils are allowed to continue historical accounting practice for 2007/08. A variety of options are provided to councils to replace the existing regulations from 2008/09, so long as there is a prudent provision.

26 As the regulations are only draft at this stage, members have authorised the County Treasurer to determine the most appropriate option once the details of the final regulations are known.