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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 03/02/2004
APPENDIX B.2 - FINANCIAL STRATEGY 2004-2005 - 2006-2007 - BUDGET STRATEGY 2004-2005 - DRAFT GENERAL FUND REVENUE ESTIMATES 2004-2005



Summary & Purpose
This report advises the Executive of the latest position regarding the General Fund Revenue Estimates. The report contains observations from the Overview and Scrutiny Committees which met on 13th January. In the light of statements by the Secretary of State on council tax levels, there are further options for consideration that could reduce the increase in Council Tax. The Executive is requested to make recommendations to Council regarding Waverley’s Budget and its element of the Council Tax for 2004/2005.

Quality of Life Implications
Natural Resource Use
Pollution Prevention and Control
Biodiversity and Nature
Local Environment
Social Inclusion
Safe Communities
Local Economy
Natural
Resource Use
Pollution
Prevention and Control
Biodiversity
and Nature
Local
Environment
Social
Inclusion
Safe, Healthy
and Active
Communities
Local
Economy
Positive
Positive
Positive
Positive
Positive
Positive
Positive


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APPENDIX B.2

WAVERLEY BOROUGH COUNCIL

EXECUTIVE – 3rd FEBRUARY 2004


Title:
FINANCIAL STRATEGY 2004/2005 – 2006/2007

BUDGET STRATEGY 2004/2005
DRAFT GENERAL FUND REVENUE ESTIMATES 2004/2005

[Wards Affected: All]

Summary and Purpose

This report advises the Executive of the latest position regarding the General Fund Revenue Estimates. The report contains observations from the Overview and Scrutiny Committees which met on 13th January. In the light of statements by the Secretary of State on council tax levels, there are further options for consideration that could reduce the increase in Council Tax. The Executive is requested to make recommendations to Council regarding Waverley’s Budget and its element of the Council Tax for 2004/2005.


Quality of life implications – social, environmental & economic (sustainable development):

Natural Resource Use
Pollution Prevention and Control
Biodiversity and Nature
Local Environment
Social Inclusion
Safe, Healthy and Active Communities
Local Economy
Positive
Positive
Positive
Positive
Positive
Positive
Positive

E-Government implications:

The Estimates contain budgets to enable the delivery of Waverley’s E-Government Strategy.

Resource and legal implications:

There are no specific legal implications as a result of this report. Resource implications are contained throughout the report.

Introduction

1. On 2nd December the Executive received an initial report regarding the draft General Fund Revenue Estimates for 2004/2005.

2. The Executive was updated on the Budget situation at the meeting on 6th January 2004 including full details and implications of the provisional Revenue Support Grant Settlement. 3. The Executive agreed in principle that, in addition to inflation, the effects of new legislation and the shortfall arising from the Settlement should be met by increased Council Tax. 4. The latest Budget position statement is shown at Annexe 1.

5. This report should be considered in conjunction with other reports on the Agenda:

· Agenda Item 7. NNDR Discretionary Rate Relief
· Agenda Item 8. Sponsored Organisation Scheme – 2004/5 Funding
· Agenda Item 11 Prudential Code for Capital Finance
· Agenda Item 14 Electronic Govt for Customer Service – Locality Office
· Agenda Item 15 Review of the Role of the Mayor
· Agenda Item 30 Council Tax Discounts for Second & Empty Homes

Budget Reductions

6. On 6th January the Executive gave initial consideration to a list of potential reductions totalling £522,000. The Executive indicated that they would probably agree with all items with the exception of the suggestion regarding Area Planning Committees, but that they would await comments from the Overview Committees before making final decisions. The full list is attached at Annexe 2

Settlement

7. The final Revenue Support Grant Settlement was announced on 29th January. For Waverley the figures were little changed, the final position being a deterioration of £2,000 from the figures reported to the Executive on 6th January.

8. As previously reported, the Government reimbursement to cover Housing Benefits and Council Tax Rebates is being entirely removed from the Formula Grant calculation from 2004/2005. Instead, the direct grant reimbursements to the services will be increased from 95% to 100%. The additional direct grant that may be anticipated based on full reimbursement is £494,000. Unfortunately, the Government’s corresponding reduction in grant is based on a formula rather than actual figures and is some £630,000. Even after allowing for the additional direct grant announced in December, total Government support for Waverley will only be £18,000 higher than in the current year.

9. The consequence of the revised Settlement is that the Government is saying that they have given all District Councils at least a 3% increase in their funding. However, in reality, Waverley is receiving additional grant of just £18,000, which is less than 0.3%. The Leader of the Council and Officers have made a total of five representations to the Office of the Deputy Prime Minister and the Department of Works and Pensions about this issue, but unfortunately the final Settlement has not been improved. 10. The shortfall in Government funding, adjusted to take account of the revised settlement figures announced in mid December, is £146,000; this is equivalent to a council tax increase of 2.2%

New Legislation

11. For 2002/2003 and 2003/4 the Council agreed to fund new legislation through a higher level of Council Tax where it could be demonstrated that the additional expenditure had not been covered by additional Government Grant. The Financial Strategy provides for this practice to continue for 2004/2005 and the Executive agreed this in principle in January. The new legislation is detailed at Annexe 3 and totals £558,000. The additional cost for 2004/5 will now be partly offset by a special grant of £47,000, but this will be for one year only. Observations from Committees

12. Corporate Overview and Scrutiny Committee
13. Community Overview and Scrutiny Committee

14. Environment & Leisure Overview and Scrutiny Committee

Review of Compensatory Grants – Consultation

15. As part of the 2003/4 Budget Setting process, the Council agreed that the compensatory grant scheme should be reviewed during the year. In part, this was in response to the increasing budget pressures that Waverley faces each year, and the consistent growth in the compensatory grant budget. Total compensatory grants for recreational facilities have increased by 42.5 % over the last four years from £71,000 to £101,000. The maximum level that could potentially be reached under the current formula is some £180,000.

16. On 2nd December, the Executive said that it was minded to accept the findings of the review: that the ceiling for reimbursement should be set at 30% of Waverley’s expenditure on recreation per head of population; subject to consultation on these proposals; and that parishes be advised to precept on this basis for 2004/5. The grant rate for actual parish expenditure would remain at 50% and for most parishes the grant would be unchanged. 17. Waverley Borough contains 21 town and parish councils, 13 of which receive compensatory grants from Waverley and a total of 6 parishes have responded formally. Cranleigh Parish and Elstead Parish Council have also expressed concerns informally. The responses are annexed to this report as follows:
Superannuation

18. Waverley’s Financial Strategy provides for Superannuation Buy-back to be financed from surplus Provision for Credit Liabilities (PCL) monies (cash-backed set-aside capital receipts) as a better alternative to generating interest for the General Fund. Until 31st March 2003, the surplus PCL resulted from the receipt of reimbursements from the Housing Corporation under the LA SHG scheme. However, from this date the Government discontinued the LA SHG scheme. While Waverley’s Financial Strategy provides for the approved figure of £7 million to be achieved by 31st March 2004, only £5 million has been achieved to date.

19. On 6th January the Executive suggested that a further £2 million Buy-back be paid from resources that would have been recycled through LA SHG and subsequently paid into the pension fund. This will achieve annual revenue savings of £212,000. This builds on Waverley’s existing Financial Strategy and the Budget proposals to be put before Council provide for £2 million further Buy-back.

Minor Changes

20. Since the meeting of the Executive on 6th January, there have been a number of changes that are taken into account on the position statement at Annexe 1: o the Government have announced recycling grant of £47,000 for Waverley for 2004/5; o additional Verification Framework & Benefits Administration Grant of £50,000 has been obtained; o the possibility of a £6,000 increase in the rent subsidy paid to Farnham CAB to cover additional rent at Montrose house;

o the request for additional resources of £21,000 to implement IEG at locality offices (Agenda Item 14);

o the proposal to reduce the discount for second homes, with the resources to be used for affordable housing (Agenda Item 30);

o the proposal to remove the discount for empty properties, which will effectively offset the deficit on the Collection Fund (Agenda Item 30).

Vehicle Renewals Fund

21. The current balance on the Vehicle Renewals Fund is £170,000. £59,000 will be required to finance vehicle purchases next year, but thereafter the requirements will be met by the contributions to the fund. It is therefore proposed that the surplus balance of £100,000 on the fund be transferred to the Revenue Reserve Fund to supplement the level of funding available to finance the remainder of the Capital Programme.

Audit Commission Report on Council Tax Increases in 2003/4

22. The Audit Commission has recently issued a report examining the reasons for the high council tax increases for 2003/4. A summary of this is attached at Annexe 9.

23. The Audit Commission report largely justifies the reasons for the relatively high tax increases in 2003/4 and supports the Local Government case that has consistently been put to Central Government. It concludes that council tax is fundamentally flawed. Unfortunately, the Government has continued to threaten capping since the release of, and in spite of, the findings of the Audit Commission.

Council Tax Capping

24. On 6th January the Executive were advised that as part of this year’s Grant Settlement the Deputy Prime Minister had made the following statement about his intention to use council tax capping: 25. During the past month more information has been released by the Government about its intention to use capping powers, if its requirements are not met voluntarily. Unfortunately, no formal guidance has been issued. However, the Director of Finance has recently obtained a copy of a letter, threatening capping, that has now been received by 31 councils that were reported as planning tax increases higher than desired by the Government. In several cases the planned increases were significantly lower than the figure of 14% suggested by Waverley’s Executive on 6th January. A copy of the letter, with the details of the recipient council deleted, is attached at Annexe 10. Responding to the Government Statement on Capping

26. The Council can provide evidence of prudent financial management from a number of sources. The Annual Audit Letter from the District Auditor (Audit Commission), Agenda item 24 confirms his satisfaction with the council’s finances, and once again the Council received an unqualified audit opinion on the final accounts.

27. Similarly, the IDeA Peer Challenge report commented on Waverley’s prudent financial management.

28. When Waverley’s council taxes are compared to the average local authority increases since 1997, Waverley’s cumulative increase is 46% compared to the average increase of 69%. More locally the two main preceptors, Surrey County Council and Surrey Police Authority have had increases of 84.8% and 214.7%.

29. Waverley’s increases are shown below:

30. Waverley’s costs have increased significantly over the last 2 years as the Government have imposed additional statutory duties, most notably linked to recycling, homelessness and licensing. These duties have come with little or no additional grant.

31. Whilst the Government does not give an indication of what council levels should be, they do produce an Assumed Notional Council Tax (ANCT) for Districts for grant purposes. In 2003/04 the ANCT was £181.32. Even with parishes/towns taxes added to Waverley’s figure, the total of £156.89 was below the Governments assumed figures.

32. Despite this background, it is clear from ministerial statements that the increase in council tax over 2003/04 will be a significant factor in determining whether capping is applied. If this is the approach followed it will take no account of the different cycle operating in different authorities where council taxes have been kept low and the low base make it difficult to finance additional costs of new legislation compared to previous high council tax authorities who now have a larger base to absorb new responsibilities.

Cost of Capping

33. The prospect of capping is particularly serious for a district council as the cost of rebilling will be significant (exceeding £30,000 in Waverley’s case) and the potential effect on cash-flow could also be substantial, as the much larger precepts from Surrey CC and the Police Authority will still need to be paid by Waverley as the authority responsible for council tax collection

34. In view of the comments in the last two sections it is a finely balanced decision as to whether to tax for new legislation or whether to reduce spending in an attempt to avoid the uncertainty, disruption and extra costs of capping.

Options to reduce Waverley’s General Fund Expenditure
35. Waverley’s budget is relatively low at around £12 million. The budget is forced to cope with significant new legislation and since 1997 includes £4.8 million of ongoing savings/reductions to achieve current council tax levels.

36. The draft budget for 2004/05 has a budget shortfall of £960,000 which the Executive have indicated how it can be met. The options open to the Council in reducing its budget still further are therefore limited. For the future it may be possible to reduce spending on some discretionary services but immediate decisions are not appropriate as potential consequences and alternative solutions need to be carefully examined.

37. The introduction of Local Government Act 2003 provides an opportunity for Prudential Borrowing to be used to reduce revenue pressures in the future, although the repayment of principal and interest is an important ongoing and cumulative consideration. With new Government regulations published in late December, it is now possible for Waverley to borrow immediately as the transitional capital receipts pooling arrangements which had been threatened, will now not apply.

38. The use of Prudential Borrowing will therefore be an important consideration in future financing decisions. It could be used in 2004/05 if Members wished, but some developments within the Revenue Reserve are examined below.

39. Members have discussed the financing of the Capital Programme throughout the budget process. The Programme is funded from the Revenue Reserve (mainly from contributions from the General Fund, Capital Receipts, Capital Grants, the Renewals and Capital Funds.

Revenue Reserve Fund

40. Last year, for the 2003/4 Budget onwards the Council decided to amend the Financial Strategy to provide for the interest on the Revenue Reserve Fund to be credited to the General Fund, rather than holding it in the Revenue Reserve Fund as had previously been the case. 41. Interest on General Fund Capital Receipts have always been credited to the General Fund. Interest on set-aside Housing Capital Receipts are likewise credited to the Housing Revenue Account (as part of the Item 8 calculation) Interest on the remaining capital receipts has been held in the Revenue Reserve Fund. In the past, this remaining interest has been relatively insignificant, it is also potentially volatile and short-term (arising from usable receipts awaiting expenditure) and Waverley’s Financial Strategy discourages reliance on unsustainable sources. 42. Recently, the accumulated capital receipts figure has increased very significantly. This arises in particular from the Government’s unexpected discontinuance of the LA SHG Programme from 1st April 2003; the high level of capital receipts in the current year; and slippage of expenditure of receipts on the Capital Programme in previous years. It is estimated that the interest on this “windfall” to be paid into the Revenue Reserve Fund will be £500,000 in the current year, £300,000 in 2004/5 and £100,000 in 2005/6. 43. If the Executive opt to reduce Waverley’s council tax increase to single figures, the Director of Finance considers that it would be reasonable to use this interest of £900,000 to abate the capital expenditure contribution from the General Fund by £300,000pa for a three-year period from 2004/5.

44. Allowing for the above adjustments the Revenue Reserve Fund would still be able finance capital expenditure from 2004/5 at the increased level of £1,300,000pa. The projected movements in the Fund for the next three years is shown at Annexe 11.

Level of the Revenue Reserve

45. Traditionally, the Revenue Reserve has been used to fund the Capital Programme, the Matched-Funding Scheme and pay for one-off revenue and capital costs facing the Council.

46. With debt-free status and the limited capital allocations from the Government before that, it was necessary to hold an extra buffer to cover for large one-off items. With the advent of Prudential Borrowing it is possible to re-consider the position of the Revenue Reserve. This is because the limits on Prudential Borrowing are determined by the Council and it is issues of affordability and prudence which affect the ability to borrow. Such an environment allows for a re-assessment of the Reserve position.

47. It is the Director of Finance’s view that the level of the Revenue Reserve indicated in Annexe 11 represents a satisfactory financial position.



Impact on Financial Strategy

48. If Members decide to use the capital receipts interest ‘windfall’ in this way it is essential that the future implications on the Financial Strategy are considered.

49. Prudential financial planning remains the key. The ’windfall’ is not sustainable in the longer term and Members must plan for the period beyond its use.

50. Options available could include:

a) the use of Prudential Borrowing;
b) further reductions to other revenue expenditure; and
c) increasing council tax (subject to any capping restrictions)

51. The introduction of Prudential Borrowing provides a robust fall-back, with the other options as possibilities. Council Tax Levels

52. A table showing the effect of the final 2004/2005 Revenue Support Grant Settlement for Waverley and various options for average Council Tax at Band D is attached at Annexe 12.

53. Four options for Waverley Council Tax increases are illustrated:

54. The full level of Council Tax in 2004/2005 will depend, of course, to a large extent on Surrey County Council and Surrey Police Authority precepts. In 2003/4, the council tax was allocated as follows: Special Expense

55. Annexe 13 shows the likely effect, in 2004/2005, of the decision taken by Council on 12th October 1999 to levy a special expense from 1st April 2000 in respect of cemeteries costs. This annexe is based on the 9% option, but the figures to be reported to Council will accord with the Executive’s selected recommendation.

56. As Farnham Town Council have agreed to assume responsibility for the cemetery function in Farnham from 1st April 2002, the special expense applies to Council Taxpayers in Haslemere area from that date.

Collection Fund

57. The Collection Fund Revenue Account brings together all of the precepts from the relevant local authorities, including Waverley’s demand net of Revenue Support Grant and redistributed National Non-Domestic Rates (NNDR), together with the contribution to the NNDR pool (net of irrecoverables) in respect of business rates collected by the Council as agent of the Government. The income to the Collection Fund revenue account relates to that amount of Council Tax which is required, together with income from business rates, to balance the account. Any surplus or deficit on the Collection Fund at the end of each year is required to be shared between Surrey County Council, the Surrey Police Authority and Waverley in proportion to their precepts for that year. The estimated Collection Fund for 2003/2004 is attached at Annexe 14.

58 As shown at Annexe 14, present indications are that there is likely to be a deficit of some £80,000 as at 31st March 2004. Waverley’s share of this will be some £13,000 which will need to be recovered through Waverley’s element of the 2004/2005 Council Tax. Members are reminded that the collection rate allowed for in the tax base was increased from 98.5% to 99% for 2002/2003 to reflect actual collection rates. The decision taken on Agenda item 30 could affect the impact of the Collection Fund deficit.

Central Allocations

59. The annual pay award, effective from 1st January 2004, has not yet been agreed and therefore at this stage the estimates still contain an assumed figure. The precise effect on the General Fund will also be dependent upon the final Practice Account and Central Support allocations, which will also take account of a number of the minor changes and cost reductions.

Conclusion

60. Local government finance remains dependent on Government grant decisions. For 2004/05 the grant Waverley receives is just 0.3% more than in 2003/04. This, together with new legislative requirements adds significant financial pressures to Waverley Borough Council.

61. Despite these significant pressures the Government are threatening to cap authorities who increase their council taxes above a non-specified figure. Members therefore have to carefully balance these legislative requirements against the potential threat of capping.


Recommendation to Council

The Executive is requested to:
5. approves the transfer of £100,000 from the Vehicle Renewals Fund to the Revenue Reserve Fund; 6. authorises the further payment of £2 million to the Superannuation Fund for Buy-back of Back-funding contributions to be met from Waverley’s accumulated capital receipts; and 7. approves the resultant General Fund Budget for 2004/5. 8. agrees that the Financial Strategy be updated to take account of the decisions taken.


Background Papers (DoF)

Final Local Government Finance Settlement 2004/5; Financial Strategy 2003/4 – 2006/7; Finance Seminar slides; draft Service Plans 2004/5; Community Strategy; Revenue Budget 2003/4; Representations from Bramley, Churt, Cranleigh, Elstead, Ewhurst and Witley Parish Councils;


CONTACT OFFICER:

Name: Brian Long Telephone: 01483 523253
E-mail: blong@waverley.gov.uk

Paul Wenham Telephone: 01483 523238
E-mail: pwenham@waverley.gov.uk

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