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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 12/07/2005
Financial Strategt 2006/07 - 2008/09 : Budget Strategy 2006/07



Summary & Purpose
This report sets out the up-to-date financial position and identifies issues which the Executive needs to consider as the Council sets its Budget Strategy for 2006/07.

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APPENDIX B
WAVERLEY BOROUGH COUNCIL

EXECUTIVE – 12TH JULY 2005

_________________________________________________________________________

Title:
FINANCIAL STRATEGY 2006/2007 – 2008/2009
BUDGET STRATEGY 2006/2007

[Wards Affected: All]
_________________________________________________________________________

Summary and purpose

This report sets out the up-to-date financial position and identifies issues which the Executive needs to consider as the Council sets its Budget Strategy for 2006/07.

_________________________________________________________________________

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

E-Government implications:

The Financial Strategy covers all areas of expenditure including Waverley’s E-Government initiatives.

Resource and legal implications

The Financial Strategy is a corporate document that identifies the financial issues and policies of the Council.

Introduction

1. The Budget Strategy forms an integral part of the Council’s Financial Strategy and this report is the first in a series which will lead to the approved Revenue Budget in February 2006.

2. The report updates the Executive on the issues which impact on the Financial Strategy. The pressures on revenue budgets at low spending authorities like Waverley Borough Council remain intense with relatively poor Government financial support, increased responsibilities being allocated from Government without additional funding, council tax capping and other local pressures.

3. The report identifies issues which the Executive need to consider as the Council sets its Budget Strategy for 2006/07.

Government Grant Settlement

4. It is expected that some fundamental changes will be made to the Revenue Support Grant system this year. The main changes affecting Districts are expected to occur around: 5. Changes affecting other services such as education and social services will also impact on Districts as control totals change, normally reducing the share of grant available. Budget Reductions

6. The Budget will include 100,000 of recurring savings identified when the 2004/05 Final Accounts were closed.

Fees and Charges

7. Generally, increases in charges in line with delegated authority will be allowed for within the draft Estimates. Where higher increases are proposed, these will be reported separately to Members.

8. The Government has been considering levels of Building Control fees and Land Charges and whether they are properly accounted for across local government. If the Government were to make changes to the level of charges, this is an area which could significantly affect the 2006/07 Budget. Waverley’s charges for these services are considered appropriate and tend to be below the highest charges in local government. Planning fees are set by Government, so consequently no increase will be assumed without specific guidance.

Planning Delivery Grant

9. Waverley has been advised that it will receive Planning Delivery Grant (PDG) of 480,000 in 2005/2006 split 360,000 revenue and 120,000 capital. There is some optimism that the Council’s improvement in planning performance will result in continued receipt of grant in 2006/07. It is expected that PDG will be announced in November 2005 which will help with budget planning for next year. The Council is required to credit this grant to the Planning service, but it is not ring-fenced so it may be used either to pay for additional Planning expenditure or to reduce Planning costs that are already budgeted for. To date the Council has spent all PDG on additional planning services in an attempt to drive service levels up.

10. The end of PDG in a couple of years time will require the Council to identify how current planning improvements are to be financed. The Council identified this as a significant issue at last year’s Finance Seminar and, as the Planning Service is a key priority in the Corporate Plan, accepted that funding might need to be found to replace the PDG. The Financial Strategy recognised that it was too early to make specific provision for this, but accept that Waverley has a good track record of achieving savings and allocating resources to key priorities. The issue will be kept under close review in the coming budget round.

Local Area Agreements

11. The Government is keen to allocate resources to upper tier authorities through Local Area Agreements. The money for these is top-sliced from county, district and borough councils’ government grant. The impact of the Surrey LAA will need to be carefully considered. Officers will be working with Surrey County Council to see what resources can be shared as LAA initiatives are delivered in the community.

Defra Waste Performance and Efficiency Grant

12. The Government has announced a three-year Waste Performance and Efficiency Grant and has allocated Waverley 41,000 in 2005/2006. This grant is designed to support new and more efficient ways to deliver waste reduction and increase recycling and diversion from landfill. The Government’s circular states ‘The un-ringfenced Grant will enable local authorities to plan such activity with certainty over a three-year period.’ While there are no specific requirements to invest the funding in a particular way, the Government strongly encourages county-district and Joint Waste Disposal Authority areas to consider joint investment to meet common goals.

13. The Council did not use this grant as general income but retained it to be reviewed when the tenders for the Waste Services Contract are evaluated. This should mean that the Council receives future grant allocations in the next two years.

Contract Retendering

14. Earlier this year tenders were received for the Grounds Maintenance and Environmental Contracts and the Council subsequently appointed two new contractors to undertake the contracts from 1st November 2005. The tendering of contracts worth around 5 million could have significantly de-railed the Council’s financial plans, but the Council’s strategy of: developing the market, not allowing for general expansion in the specification and adjusting the inflation indices has assisted the budget process by producing net savings of well in excess of 200,000.

15. The Waste SIG has recently been looking at alternative waste collection options aimed at improving the Council’s recycling rate. The detailed findings of the SIG demonstrate that it is possible to increase the Council’s recycling rate fairly significantly and to make further savings in the waste contract by moving to Alternate Weekly Collections, (AWC). In addition, the SIG has identified ways to improve the waste and recycling service which will use some of the potential savings. If Members agree to move to AWC to improve the recycling rate it is essential to see potential savings against the Council’s overall budget, where there is an underlying imbalance, rather than just being available to spend on the waste and recycling service. Ongoing savings must also recover any set up costs associated with the agreed changes.

Local Government Act 2003 – Financial Administration

16. The requirements of the Local Government Act 2003 continue to be important considerations against which the Budget will be developed, namely:

Budget calculations: report on robustness of estimates;

Adequacy of reserves, and

Budget monitoring The Robustness of the Estimates 17. Full account will be taken of potential costs and adequate provision will be made. A prudent assessment of income will be undertaken and only income which has a high level of certainty of being received, will be included within the Council’s budgets.

18. The Council’s Financial Strategy, together with information presented at the Annual Finance Seminar and subsequent reports, will aim to demonstrate the financial challenges facing Waverley Borough Council in the short and medium-term.

19. The key strategy issues for the General Fund from the current Financial Strategy, include: How to respond in future to Waverley’s inability to raise council tax by the increase in underlying expenditure Priorities v. non-priorities Further budget pressures and Government Legislation How the Revenue Reserve Fund should be used Spending on public services in an affluent area Government Formula Grant likely to be at ‘floor’ in future settlements Use of ‘windfall’ interest from capital receipts ends in 2006/07 Formula Grant fixed: Subsequent gearing effect means that the percentage council tax increase is nearly twice the percentage increase in expenditure Assessing whether support to the Capital Programme can be continued Assessing how the planning service can be maintained when Planning Delivery Grant expires.

Budget Strategy 2005/06

20. The Council in setting the Budget in 2005/06 acknowledged:

1) that current shortfalls in projected income compared with likely expenditure cannot be sustained in the longer term; 2) that council tax capping and the level of balances reduces the Council’s flexibility; 3) that contract re-tendering and superannuation back-funding and government grant could significantly increase the budget shortfall; and 4) the future impact of Housing Options which would lead to a massive change in the Council’s organisation.

21. Because of the uncertainties particularly in 3) and 4), above, the Council agreed not to make radical changes affecting services until 2006/07 when issues are clearer.

22. Whilst radical changes in service were not considered appropriate for 2005/06, the Council did:

Critically examine Budget Variations; Allow flexibility in the new contracts being tendered; and Looked to contain staffing costs within the 2004/05 cash budget, making staff reductions of 294,000 to pay for the annual pay award.

23. In view of the level of awareness amongst members about the longer-term financial position and the action taken to produce the Council’s Budget in 2005/06, the Director of Finance was satisfied with the robustness of the Council’s Budget. The situation will need to be reconsidered for 2006/07.

Adequacy of Reserves

24. The Council maintains a number of reserves, which are detailed in the Financial Strategy. The Council aims to maintain a prudent level of balances to support revenue spending and finance unforeseen events. The two major reserves for General Fund purposes are the General Fund balance and the Revenue Reserve Fund.

25. It is the Director of Finance’s view that both the General Fund and Revenue Reserve Fund should be at least 1 million. The Financial Strategy explains the purpose of each fund. The General Fund is the balance, which supports fluctuations in the Council’s normal budget e.g. changes in inflation and interest rates, higher than anticipated expenditure or loss of income and spending on unforeseen events. The Revenue Reserve Fund is used to finance capital expenditure and one-off costs. With the uncertainties around the stock transfer and the organisational restructuring referred to above, 1 million is essential to safeguard the Council’s financial position.

26. The General Fund Working Balance and the projected movement in the Revenue Reserve Fund for the next three years are shown at Annexe 3.

27. In closing the final accounts for 2004/05 the Executive has seen some improvement in both the General Fund and Revenue Reserve Balances. In the case of the General Fund this was brought about by:

Prior Year Items of 315,000 added to balances, and

An underspend of 310,000, of which 100,000 is expected to be repeated in future years. For the Revenue Reserve the improvement was brought about by additional interest income resulting from extra housing capital receipts and delays in spending on approved capital schemes.

28. This updated financial situation whereby the General Fund and Revenue Reserve balances are forecast to be 1.36m and 1.4m at the end of 2008/09 could allow for some flexibility in budget setting. However, the underlying position remains unchanged with the Council’s current General Fund revenue spending exceeding its income by 650,000. Whilst the ongoing savings of 100,000 and the savings achieved in the recent tendering of the Council’s major contracts will help ease some of the pressure on the budget, the following factors could have a significant impact on future budgets:

The full costs of Free Bus Passes

Government Grant Settlements

Changed Government accounting treatment for local authority fees

Changes to the Superannuation scheme whereby savings previously budgeted for are not being achieved.

Inadequate funding of the Capital Programme
Proposed Stock Transfer

29. If tenants vote for the Stock Transfer it is estimated that there will be no adverse impact on the General Fund in 2006/07 and that diseconomies will be offset in future years by interest income.

30. If however, tenants vote against stock transfer, and the Council fails to achieve the Decent Homes standard, it is expected that there will be adverse affects on both the Housing Revenue Account and the General Fund in future years. More information will be presented to members later in the year.

31. Members are reminded that the Revenue Reserve will have to meet a significant part of the ‘ballot’ costs, possibly around 250,000, tenants vote against stock transfer.

Council Restructuring

32. The financial implications of the restructuring of the Council’s officer structure will have to be carefully considered. Whilst savings are possible, provision needs to be made for the ongoing costs of any restructuring, together with any one-off costs. It will be appropriate to charge one-off costs to the Revenue Reserve.

Capping

33. The Government has announced that it intends to cap nine authorities in 2005/06 because their spending and budget exceeded the Government’s definition of what was an acceptable council tax increase. It is to be noted that the 2005/06 capping criteria were tighter than the previous year. For planning purposes it is reasonable to assume that capping will be repeated in 2006/07 even though criteria will not be announced until much later in the budget process.

34. The prospect of capping remains particularly serious for district councils as the cost of re-billing is significant (reportedly around 100,000 from the capped re-billing councils in 2004/2005) and the potential effect on cash-flow is also substantial, as the much larger precepts still need to be paid by the Districts responsible for council tax collection.

Superannuation

35. Whilst the impact of the 2004 triennial pension fund revaluation was included in the 2005/06 Budget, the late adjustment by the Deputy Prime Minister to the proposed pension rule changes from 1st April 2005 will result in an increased shortfall to Waverley’s share of the Surrey Pension Fund, as the pension savings are not currently being achieved. Exactly when these costs will be known and charged is unclear.

Risk Analysis

36. Members were informed of the key risks around the 2005-06 budget at the Finance Seminar in October 2004. Some of these factors were identified as risks because, at that time, their impact on the budget was unknown such as the extent of the superannuation increase, contract prices and the uncertainty around the grant settlement. Whilst some aspects have become clearer there is continuing uncertainty around government grants, superannuation and the other factors listed in the Annexes. In addition, forecast reductions in interest rates and forecast use of capital receipts will have a direct impact on the General Fund. It will be necessary to take a view on these issues when the Budget is set in February 2006.

Government Efficiency Targets

37. Waverley is required to identify an efficiency saving of 2.5% per annum from 2005/06 to 2007/08. The 2005/06 savings have already been identified, but consideration needs to be given as to how the target will be met in future years. More information will be provided to Members throughout the budget process. Over the last two years the Council has saved 100,000 and 294,000 respectively, in staffing costs. Whilst further net savings are anticipated after the restructuring of the Council, post the housing ballot, officers do not consider that further staff reductions to pay for the annual pay award in 2006/07 will be achievable without a significant impact on services.

Capital Programme 38. Capital resources remain extremely limited whilst proposed capital schemes greatly exceed the available resources for the Strategy period. Officers, through the Asset Management Group, are currently assessing capital schemes in order to feed them into the budget process in the autumn. Whilst Partnership Funding should be possible in 2006/07, the exhaustion of the fund will create an extra pressure in 2007/08 if Members wish to retain the scheme. It is proposed that priority be given to health and safety schemes and those which reduce the impact on the General Fund revenue account in future years. The full list previously agreed by Council in priority order is as follows:
Prudential Borrowing

39. Currently, Prudential Borrowing of 450,000 has been approved to finance the Weyhill Car Park scheme. This scheme is expected to make a positive return.

40. Whilst either Prudential Borrowing or further use of the Revenue Reserve Fund could fund part of future budget shortfalls, avoiding further use of the Revenue Reserve Fund will tend to maximise flexibility because it can be used for both revenue and capital purposes, whereas Prudential Borrowing may only be undertaken for capital purposes.

41. At this early stage in preparing the 2006/07 Budget, it is proposed that Prudential Borrowing will only be considered for revenue earning schemes. However, the pressures on the revenue budget could force a revision to this policy.

Key Budget Issues 2006/07

42. Decisions on the General Fund Revenue Budget continue to impact on the Council’s reserves. Based on the 2005/06 budget, the Council’s expenditure is 650,000 more than its income. This difference is being financed from the Revenue Reserve and is made up of:

43. Some ongoing savings have resulted from the Council’s policy for letting its major contracts. However, as detailed earlier in the report, there are significant potential pressures on the horizon which would more than offset these savings, namely:

The cost of implementing the future bus pass to the over 60s, and how little government grant comes with the responsibility (250,000 - 650,000),

Changed government accounting rules for land charges and building control fees (approx 500,000),

Superannuation

The revised Revenue Support Grant System

The continual excess of expenditure inflation over income inflation, and

Inadequate funding of the Capital Programme.

44. The outcome of the housing ballot will have a major financial impact on the Council. If tenants vote in favour of stock transfer, the Council will have to manage diseconomies in the General Fund, but will have interest income to offset these extra costs. If it is against, the inability of Housing Revenue Account to deliver Decent Homes and other works will produce a diminishing HRA which will have knock-on consequences for the General Fund as it is unable to afford the General Fund recharges currently charged there. In addition, the Revenue Reserve will have to meet a significant part of the ‘Ballot’ costs.

45. Maintaining the Council’s capital assets with an inadequate resource base, continues to be a major pressure which can affect the revenue budget either through increased running costs, reduced income from assets and demands to continue with a significant revenue contribution to pay for capital expenditure.

46. When the 2005/06 Budget was agreed, the Council decided not to undertake radical changes affecting services because of future uncertainties. Whilst the issue of tendering is now clear, superannuation and stock transfer issues still remain uncertain. At that time, the three year forecast showed reserves and balances at 2m by the end of 2007/08. 47. As the Council reconsiders its Strategy these uncertainties have been added to, particularly with the costs of free bus passes and questions over local authority fee income. However, the new three year forecast of reserves and balances is forecast to be 2.75m by the end of 2008/09, although the same potential threats remain around a failed ballot and the potential costs of restructuring the Council.

48. In view of this, the Council has the opportunity to review the current approach to the Budget Strategy and could decide whether to consider:
Recommendation

It is recommended that:

1. the Executive notes the updated financial position on the General Fund Revenue Account;

2. the Executive notes the potential impact on the Housing Revenue Account and General Fund if the ballot of tenants is not in favour of stock transfer;

3. the Executive considers the options in paragraph 48 and indicate which one should be used in approaching the Budget Strategy for 2006/07;

4. officers continue to identify savings and efficiencies in budgets in the light of the underlying General Fund deficit and the Gershon efficiency agenda;

5. the Executive agrees the Priority order for the Capital Programme listed in paragraph 38;

6. the Executive and officers make representations to the Government about the potential costs of free bus passes; working with other councils and the Local Government Association as appropriate; and

7. the Director of Finance presents a further update on the Council’s financial position to Members at this year’s Finance Seminar.

Background Papers (DoF)

Financial Strategy 2005/06 – 2007/08
Finance Seminar slides;
Service Plans 2005/6;
Community Strategy;
Revenue Budget 2005/06.

CONTACT OFFICER:

Name: Paul Wenham Telephone: 01483 523238

E-mail: pwenham@waverley.gov.uk

Comm/executive/2005-06/078