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Waverley Borough Council Committee System - Committee Document

Meeting of the Executive held on 12/07/2004
Financial Strategy Review









FINANCIAL STRATEGY

2004/05 – 2007/08




FINANCIAL STRATEGY
2004/05 – 2007/08
WAVERLEY BOROUGH COUNCIL

INTRODUCTION

Waverley’s Medium-Term Financial Strategy is well established and embodied in the workings of the Council. The annual Members’ Finance Seminar and the budget process updates the Council’s 4-year strategy which is composed of many elements relating to different aspects of Council business.

This document brings the elements together.

Purpose

The Purpose of this Strategy is to

define the aims of the Council in financial terms;

assist with the Council’s strategic planning and policy making;

assist with budget setting; and

demonstrate stewardship of community resources.

Timeframe

The elements of the Financial Strategy relate to current and future years. Whilst precision is more difficult in future years, mainly due to changing Government policies and an unwillingness on their part to-date to give forward financial plans for local authorities, this documents considers the period to 2007/8.

Audience

Whilst there is a wide audience of interested parties in the Council’s financial strategy from Borough residents, Local Strategic Partners, Registered Social Landlords, the Audit Commission etc., this document is primarily for the benefit of members and officers in the first instance.


SUMMARY – FINANCIAL STRATEGY KEY ISSUES

General Fund:

q How to respond in future to Waverley’s inability to raise council tax by the increase in underlying expenditure

q How the Revenue Reserve Fund will cope with a reduced balance

q Further budget pressures and Government Legislation

q 2004/05 transitional Government funding will not continue

q Use of ‘windfall’ interest from capital receipts ends in 2006/07

q Formula Grant fixed: Subsequent gearing effect means that the percentage council tax increase is nearly twice the percentage increase in expenditure.

Housing Revenue Account:

q Funding ‘Decent Homes’ standards

q Future rent levels

q Loss of Government Housing Subsidy

q Withdrawal of Supporting People Funding

Capital Programme:

q Prudential Borrowing

q Affordable Housing

q Decent Homes

q Leisure provision in Godalming

q Improvements and maintenance of assets






SUMMARY – FINANCIAL STRATEGY KEY POLICIES

Reserves and Balances will be held to support unforeseen costs, in particular:

q The General Fund balance will be maintained at a prudent level of 1 million;

q The Housing Revenue Account balance will be maintained at a prudent level of 1 million;

q The Revenue Reserve will be used to support the General Fund Capital Programme and one-off items of revenue and capital expenditure;

q The Revenue Reserve Fund will contribute 1.3 million each year to capital financing from 2004/05, subject to an annual review;

q The “windfall” interest on housing capital receipts will be transferred from the Revenue Reserve to the General Fund revenue account by abatement of the annual capital financing contribution over three years commencing in 2004/05;

q The Insurance Reserve will be retained to provide a basis for self-insurance, to review excess levels and/or to meet any potential claims from MMI.

Other key policies include:

q No overall in-year savings target is included in the 2004/05 budget but a departmental housekeeping target of 50,000 has been set;

q Waverley intends to spend income generated from the reduction in second homes council tax discount, on affordable housing in the Borough;

q A Godalming Leisure Centre Fund has been created with a transfer of 0.5 million from General Fund capital receipts;

q Prudential Borrowing is not planned for 2004/05 but the position will be reviewed each year;

q Housing capital receipts will continue to be spent on housing capital schemes based on 50% decent homes and 50% affordable housing;

q No further Pension Fund capitalisation is planned, but this position will be kept under review; and

q Waverley will undertake a consultation exercise on spending priorities and council tax levels ahead of the 2005/06 budget process.




An Introduction to Waverley Borough Council’s Finances


Background

Local government finance is relatively complex. All financial powers result from statute and, given successive Governments’ attempts to control local authority spending, policies have been developed in a piecemeal way. There are many inconsistencies. This section of the Strategy seeks to explain the basics.

Revenue and Capital

Waverley’s income and expenditure is categorised between revenue and capital. Whilst there is a limited amount of movement between the categories the basic definitions are:

Revenue expenditure is spending on goods and services which are used up in the financial year. Examples are staff salaries, payments to contractors to empty bins, electricity bills, council tax benefits etc

Revenue income is income generated from the cost of providing services. Examples include car park charges, planning fees, rents etc.

Capital expenditure is spending on new or replacement assets which will last for a number of years. Examples include a new sports centre, new affordable homes, and maintenance of existing assets which will substantially prolong their life.

Capital Income is money received from the sale of capital assets. Examples include sums from council house sales, land disposals etc.

Whilst revenue and capital expenditure is accounted for separately, the budget-setting process takes an integrated approach and this is explained in the Strategy.

Housing Revenue Account and General Fund

In addition to the distinction between revenue and capital, the Government provides a strict distinction between the Housing Revenue Account and the General Fund.

The Housing Revenue Account is where the costs of providing council housing are charged. It covers the landlord cost of providing those homes and is funded by council tenants.

The General Fund is the place where all other council services are accounted for. Examples include planning, environmental and leisure services. Whilst some income is collected from users of services and the Government make a contribution through Formula Grant; the balance is met by council taxpayers.


General Fund

A detailed analysis of the Council’s General Fund income and expenditure is shown in the Council’s Annual Budget 2004/05.

Expenditure is summarised as follows:

000
Employees
10,246
Premises
2,854
Transport
75
Supplies & services
6,838
Transfer payments
19,333
Support costs
970
Capital charges
1,085
TOTAL
41,401
Income
29,026
Net expenditure
12,375

How is the balance financed?

The net cost is financed from:

Formula Grant which is made up of re-distributed business rates and Revenue Support Grant, and

Council tax, and

Use of balances

The amount of grant a local authority receives is determined by the Government, according to a formula that assesses what the authority needs in order to provide a standard level of service against how much it can be expected to collect from council tax, less the re-distributed share of Business Rates.

The Formula Grant is targeted to areas of high social need with more affluent areas like Waverley receiving proportionately less. Whilst central government targeting of resources is accepted, Waverley, with other similar local authorities, has campaigned for a fairer distribution of government grant to reflect the costs of providing essential services to Waverley’s residents.

The Council determines the amount of council tax it will charge residents each year. Once the indicative council tax, fees & charges and government grant has been taken into account, any budget shortfall will need to be addressed by:

Savings;
Additional use of balances or reserves;
Additional income, or
A greater increase in council tax.

The Government’s council tax capping guidance is a critical consideration in determining the outcome.

Waverley’s council tax funds 58% of its net expenditure with government Formula Grant accounting for just 42%. Because the government grant is fixed, any increase in Council spending above current levels will fall to be met disproportionately by council taxpayers. This is known as the gearing effect. For example, a 1% increase in council spending will result in a council tax increase of approximately 1.7%.

Housing Revenue Account

A detailed analysis of the Council’s Housing Revenue Account income and expenditure is shown in the Council’s Annual Budget 2004/05.

Expenditure is summarised as follows:

000
Employees
3,300
Premises
2,869
Supplies & services
214
Support costs
624
Capital charges
18,550
Housing subsidy
7,700
Others
1,798
TOTAL
35,055
Income
Rents & Other Income
20,185
Capital Charge reversal
14,870
Net expenditure
0

Independent Assessment of Waverley’s Finances

Waverley Borough Council, like all local authorities, is subject to external audit. The external auditor, who is appointed by the Audit Commission, is currently the District Auditor.

The District Auditor produces an Annual Audit Letter, which comments on the financial standing of the authority. In the latest letter the District Auditor said that “the Council’s overall financial position remains healthy”. In addition, the District Auditor passes an opinion on the accounts of the Council. In the latest audited accounts for 2002/03 the District Auditor once again gave an unqualified audit opinion agreeing that the accounts presented fairly the Council’s financial position.

In addition, the council has recently been subject to a Comprehensive Performance Assessment by the Audit Commission. Their assessment was that ‘The way Waverley Borough council is run and the delivery of its services is good’. An important part of the Audit Commission’s opinion was based on the Auditor’s judgement where the Council scored very highly. This judgement assessed financial controls and processes and other key financial matters.

Framework of Control

Every local authority is required to make proper arrangements for their financial affairs and appoint an officer responsible for those affairs under S151 of the Local Government Act 1972. The Director of Finance is Waverley’s officer responsible for financial affairs. In fulfilling his duties he has appropriately trained and qualified internal audit and accountancy teams to help maintain the integrity of the Council’s financial controls and procedures.

Following the introduction of the ‘Modernising Agenda’ the Council has recently updated its Finance and Contract Regulations, which are the day-to-day rules on which the Council’s financial business is conducted.

Financial Advice

The Director of Finance advises the Chief Officer Group and the elected Members on financial issues. The advice covers revenue and capital implications of decisions and proposals and assesses the risks associated with them.

Budget Monitoring and Control

Procedures are in place to ensure that budget managers and elected members are provided with up-to-date financial information on a regular basis to enable any necessary action to be taken. The information is comprehensive and is reported monthly for key budgets and bi-monthly for other budget areas. The nature of the budgets and any associated risks are taken into account in determining the monitoring procedure and any recommendations for action.

REVENUE – GENERAL FUND

Budget Setting

In setting the General Fund Revenue Budget, Waverley aims to achieve the following objectives:

allocate resources to the areas that matter most to Waverley’s residents
eliminate any surplus budgets
maximise income
ensure priority areas are adequately resourced including contractual commitments
budgets which support Waverley’s medium-term aims
review the adequacy of budgets for maintenance of assets
review spending on non-priority areas
properly resource agreed service reviews Whilst in general, an incremental approach is currently adopted in setting the revenue budget, it is important that the necessity and level of every budget is considered against Waverley’s corporate objectives. It is not proposed to undertake a comprehensive zero-based budget process, however, the following approaches are being used to set future budgets:

Identify and review discretionary expenditure to seek to create opportunities for switching this resource to other priorities.
Review controllable budgets to identify potential savings or income-earning opportunities, taking account of past years spending patterns.
Identify each year, known or possible significant budget variations for the 3 years following the budget setting year from service plans. Appendix 1 identifies the estimated major variations for the period 2004-05 to 2006-07.

Waverley gives compensatory grants to Parish Councils for recreational services. The scheme was revised during the 2004/05 budget process to control total potential spending.

Use of Balances

Waverley aims to maintain a prudent level of balances to support revenue spending and finance unforeseen events. As part of the 2004/05 Financial Strategy preparations, balances were reviewed to ensure that they were adequate and that dependency on balances is kept within sustainable limits.

The Local Government Act 2003 places a new responsibility on the Director of Finance to report to the Council on the adequacy of financial reserves. This report is made each year as a part of the budget setting process, but in terms of the Financial Strategy, the prudent level of General Fund balance in the medium term is shown in appendix 1. The table shows that at the current rate of funding the general fund revenue budget, the balance will reduce to 1m by the end of 2004/05, with a further 1.2m in the revenue reserve at the end of 2007/08. There will be some fine-tuning between the Revenue Reserve Fund and the General Fund balance each year to ensure that the General Fund balance stays in line with the level shown in appendix 1.


Council Tax Levels

Waverley’s General Fund budget is funded approximately 42% government grant and 58% council tax. As Waverley is protected by the current ‘floor’ mechanism in the government grant settlement formula, it is expected that it will only receive a small increase in grant for the foreseeable future. Therefore, in broad terms any percentage increase in net General Fund expenditure above inflationary levels will more than double in terms of council tax increase. Appendix 2 sets out Waverley’s council tax calculation and shows percentage council tax increases for the past three years.

In the medium-term, the main areas affecting council tax levels are:

- the cost of new government requirements and priority services
- the availability of balances to support the revenue budget
- the continued revenue funding of the capital programme
- the ability to continue to identify cost savings from the base budget
- the cost of pensions
- the sustainability of income levels
- the continued achievement of savings targets
- the potential to borrow to fund capital investment
- the Governments council tax capping criteria

In the four years to 2003-04, Waverley’s objective was to limit council tax increases to national inflation, ignoring the contracted inflation indexed in contracts, plus Government imposed services and legislation. With the change of Administration in May 2003 this policy was reviewed. The Council sought to follow the same approach. In 2004/05 the implied council tax increase would have been 14%, however, in the light of Government statements threatening capping, the Council reconsidered its position and agreed an average council tax rise of 6.2%.

Waverley uses powers to charge a special expense to council taxpayers in Haslemere for the costs of Waverley running cemeteries in this area only. This has the effect of reducing the council tax on the other areas of the Borough.

In addition, the Council have invited towns and parish councils to take over the running of a number of important environmental services.

Council Tax Consultation

Waverley’s Community Plan and Corporate Strategy set out the priorities for the Council based primarily on consultation with the Borough’s residents through Ward events and other forums. This allows the views of the public on spending priorities and their effect on council tax levels to be considered. Formal consultation was carried out for capital and revenue spending in the late ‘90’s’.

Members have agreed to a consultation exercise for the 2005/06 budget, which will link with the wider consultation strategy.


Budget Issues

Key Strategy Issues for General Fund:

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 will cope with a reduced balance
Spending on public services in an affluent area.

Government Formula Grant likely to be at ‘floor’ in future settlement

2004/05 transitional Government funding will not continue.

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.

Transfer of Rent Rebates from HRA with losses in Formula Grant


In-Year Savings Target

Since 2002/03, the Council set a general in-year savings target to be managed by the Chief Officer Group. This is additional to any service-specific target reductions which are included in the annual Budget. The approach recognises that the budget is an ongoing/living process and there will be opportunities to influence financial matters throughout the year and move resources to priority areas. The target is monitored by officers and reported to the Executive alongside the standard Budget Monitoring process. For 2002/3 and 2003/4 a modest target was set at 1% of the net General Fund Budget. For 2002/03 the target was fully met, however, achieving the target in 2003/04 proved difficult with low interest rates, and other spending pressures. In view of this the Council chose not to include an in-year savings target for 2004/05, but included a smaller 50,000 departmental ‘housekeeping’ savings target.

Partnerships

Waverley’s Sponsored Organisation Scheme (SOS) continues to provide a significant level of revenue funding, currently 0.6m, to a large number of charitable and voluntary organisations in the borough.

The application and assessment criteria for the SOS was reviewed in 2003-04 to ensure that the scheme continues to support corporate objectives

The effectiveness of the annual funding applications were also reviewed

Waverley chooses to give a number of charitable and community organisations discretionary rate relief on their business premises. This policy supports Waverley’s Community Strategy partnership theme and provides good value as the costs are shared with the Government. Waverley’s costs on the General fund are around 30,000 pa. With the introduction of CASC, which allowed sports organisations to at least receive the same amount of rate relief (and in many cases receive more), the Council has been working with sports clubs to switch the funding support from the Council to the Inland Revenue.

Collection Fund

Waverley is defined, by the Local Government Finance Act 1992, as a Billing Authority for the purposes of billing and collecting Council Tax. As a Billing Authority Waverley must maintain a Collection Fund where it accounts for all the transactions relating to the collection of Council Tax and Business Rates, the payment of precepts and the payment of Business Rates over to Central Government.

Each year, before setting its Budget for the forthcoming year, Waverley must decide how much of the amount due for the year in respect of Council Tax will be collected – the Collection Rate – and adjust its tax base to allow for this. An actual collection rate better or worse than the estimate will generate a surplus or deficit on the Collection Fund for the year which must subsequently be shared by the major preceptors on the Collection Fund.

The collection of Council Tax at Waverley has been consistently high and the currently assumed collection rate is 99%.

Council Tax Discounts for Empty Properties and Second Homes

For 2004/05 the Council was permitted by the Local Government Act 2003 to reconsider the council tax discounts on long-term empty properties and second homes. Until 1st April there was a nationally set discount of 50% for these types of property.

From 1st April is was possible to remove the discount on long-term Empty Properties and reduce the council tax discount for Second Homes to 10%. The Council chose to make full use of the changes. The income generated from Second Homes can be spent on any service, however, it is the Council’s intention to spend the resources on affordable homes if a satisfactory scheme can be agreed with Surrey County Council and Surrey Police Authority.

Unforeseen Events

Waverley will continue to use its balances and reserves to support unforeseen non-operational events subject to the necessary approvals as required by the Financial Regulations and Waverley’s Constitution.

Funds and Reserves

Waverley holds a number of funds and reserves for a range of specific and general purposes. Unless otherwise approved, these amounts must be used for their intended purpose and support Waverley’s key objectives. The following provides more detail on the key General Fund reserves and funds.

Revenue Reserve Fund – this is a well-established reserve that is used mainly for supporting the capital programme and one-off items of revenue and capital expenditure. Its prime funding is from an annual contribution from the General Fund representing repayments of capital advances. Maintaining a significant reserve was particularly important with the uncertainty surrounding government policy for capital spending. However, with the introduction of Prudential Borrowing it was possible to re-consider the appropriate level of future balances. Appendix 5 shows the revenue reserve current balance and projections for the next 4 years.

Insurance Reserve – The insurance reserve stands at 862,000. Waverley currently has a long-term agreement with Zurich Municipal for all insurance policies and has experienced significant increases in premiums in recent years which fall on the council tax payers and housing tenants. There is very little competition in the local authority insurance market, currently, and in general, the number and value of claims have increased significantly. The long-term agreement ends in 2005 and the service will be tendered on the open market. At this point, the Council will assess the adequacy of cover and the options available, including the use of this reserve. Currently, the Financial Strategy allows for the continuation of the insurance reserve at its present level for its original purpose to provide a basis for self-insurance and/or to review excess levels to ease pressure on revenue budgets. There is also still the possibility that claims from MMI will need to be met from this reserve.

Godalming Leisure Centre Fund – One of the Council’s key priorities is to provide a new leisure centre in Godalming. A review of the level of Capital Receipts allowed 0.5m to be transferred into this new fund.

Other Specific Reserves – Waverley holds a number of other small amounts that are held to finance specific costs in the future. The balances are reviewed on an annual basis. These balances amount to around 600,000 including 300,000 in the capital fund, 100,000 in the renewals fund and a total of 200,000 in a number of small funds held for a variety of purposes.

HOUSING REVENUE ACCOUNT (HRA)

The HRA is the Council’s landlord account and contains only the costs and income from managing and maintaining the Council’s dwelling stock. There are currently over 5,000 properties.

Revenue Budget

Statute requires the Council to avoid a deficit on each years budget. The Council must therefore estimate as accurately as possible the total level of income it will need to raise from rents having regard to the estimated cost of managing and maintaining the properties each year, taking account of any Government subsidy entitlement and other likely income from charges for services and facilities.

Rent Restructuring

This is the Government’s new approach to the calculation of social rents introduced from April 2002. The aim of the policy is that social rents on similar houses in the same area should be the same, regardless of who is the landlord. The key to achieving the policy objectives is a common formula for both local authority landlords and Registered Social Landlords (RSLs). The formula reflects

Relative property values Local earnings Property size

Whilst the Government wants the restructuring process to be broadly complete by 2012 it is also concerned to limit changes in rent levels in any one year by applying a cap of inflation plus 2.

Waverley has introduced the principles of rent restructuring to its rent setting process and calculated target rents for each of its properties. However, the requirement to set a balanced budget for the HRA means that there are conflicting pressures between the Government’s policy aim of restricting annual rent increases and the level of service provision to tenants.

Waverley’s policy in the next three years is to continue with the rent restructuring process until convergence is achieved.

Government Housing Subsidy

Housing subsidy is now paid to the Government from the HRA to meet the surplus of income over expenditure based on a notional HRA. The calculation is based on a series of Government assumptions about the level of rents Waverley will charge, the amount it will spend on management and maintenance of the stock etc. This calculation produces a notional surplus that was previously used to offset the cost of rent rebates and subsidy is paid on any balance. From 1st April 2004 rent rebates were transferred to the General Fund so the resultant surplus of 7.7m is now paid to the Government.

Supporting People

The financial year 2003/04 was the first year of the Government’s Supporting People (SP) regime. This replaces a number of funding streams with a single SP grant used to pay for the provision of housing-related support services such as those provided for tenants of Waverley’s sheltered accommodation. Waverley previously met the cost of support from its overall rent income (i.e. a separate charge for the cost of support was not identified). The support costs of those tenants in receipt of housing benefit (HB) is now being met by the new SP grant. From 1st April 2003 tenants not in receipt of HB will be expected to meet the cost of their support in addition to paying their rent.

As a consequence of the SP regime, Waverley received some 1m SP grant in 2003/04. 300,000 of this is required to fund the cost of those tenants receiving support services at 31-3-03 who are not in receipt of HB. The balance of 700,000 is to be used to fund Decent Homes repairs. A similar amount is also expected to be available in 2004/05. Beyond this however, the lack of certainty from the Government means that the Financial Strategy will need to be revised as more information about future SP funding is available.

As the Government expects authorities to set rents with regard to rent restructuring, it has not expected rent levels to reduce as a result of the introduction of the SP funding.

The total amount of SP funding is cash limited and as all schemes within SP will be subject to review during the first 3 years of the new regime there are potentially serious implications for all support providers for some of the less popular housing schemes or those that are perceived as being costly to run.

Tenant Consultation

The Council continues to build on tenants’ involvement developed over the last 6 years. This involvement includes

working with the Tenants’ Panel and local tenants’ associations encouraging more tenants to become involved at grass roots level

involving 2 Tenant Panel representatives on the Community Overview and Scrutiny Committee

developing tenant involvement in line with the Best Value regime

delivering improvements to the tenants involvement strategy in line with the action plan in the Tenant Participation Compact introduced in April 2000

A further tenants satisfaction survey was carried out during 2003/04 which showed good overall satisfaction with the housing service.

Waverley also consults regularly with its tenants on other specific issues. Tenants were consulted on their satisfaction with the repairs service before the recent introduction of new, longer-term, contracts for responsive repairs and a member of the tenants’ panel was involved in contractor selection.

Pressures/Constraints

Key Strategy Issues for Housing Revenue Account:

Funding ‘Decent Home’ standards

Priorities v Non Priorities

Future rent levels

Loss of Government Housing Subsidy

Rent Restructuring

Withdrawal of Supporting People Funding

Use of Balances

A prudent level of working balance is maintained to support revenue expenditure for unforeseen items or to meet fluctuations in income. Given the current level of HRA balances at 1 m, it is no longer an option to use balances to keep rent levels down if adequate reserves are to be maintained. The balances are shown in Appendix 3 together with a summary of the main pressures facing the Housing Revenue Account.

Decent Homes Standard

A major Government policy initiative is the introduction of the Decent Homes Standard and the requirement laid upon all local authorities and housing associations to bring the stock they own up to the Government’s ‘decent’ standard by 2010.

One of the Council’s key strategic housing aims, recognised in the 2003/04 Housing Strategy update, is investment in the existing housing stock to meet the Decent Homes Standard. Waverley’s HRA Business Plan for 2003/04 also recognises the importance of the Decent Homes Standard and details how the extent of its ‘non-decent’ property is being quantified. Future Plans will set out how the Standard will be delivered and Local Authorities are required to carry out an appraisal of the four available investment options by 2005. These options are:

Retaining the stock Set up a high performing Arms Length Management Organisation (ALMO)

Pursue a Private Finance Initiative Scheme (PFI) Transfer the stock to a Housing Association Under the first three options the stock remains in local authority ownership.

The Council is required to complete its Housing Options Appraisal by July 2005 to demonstrate how the Decent Homes target might be achieved by 2010.

The Council has established a Special Interest Group to advise the Housing Portfolio Holder; consisting of members, tenants and staff representatives. Additionally, the Council has appointed an Independent Tenants Adviser to work with tenants throughout the Options Appraisal to gain tenants views. Specialist Housing Financial Consultants are also being employed.

It is expected that the Council will be able to make its choice on Housing Options in September 2004. The ultimate choice will have implications for the Council’s revenue and capital resources. These will be considered by Members in making their choice.


CAPITAL FINANCING

Prudential Borrowing

From 1st April 2004 the Government introduced a new Capital Financing regime. The existing borrowing controls regulated by fixed allocations have been replaced with a new Prudential Borrowing Code. This will enable individual authorities to take their own borrowing decisions provided these are informed by good practice guidelines as outlined in the Code.


Debt-Free Position

Waverley achieved Debt-Free Status on 1st April 2001 and took the policy decision to maintain that position as part of its Financial Strategy.

The main benefit of Debt-Free Status was that 100% of all new capital receipts were usable (with a few exceptions); whereas, for authorities with debt, only General Fund Receipts were 100% usable, with 75% of Right-to- Buy receipts required to be set aside. However, from 1st April 2004 being Debt-Free no longer provides these advantages and 75% of Right to Buy receipts now have to be paid to the Government. However, transitional arrangements will taper the full impact over the next 3 years.

Future Prudential Borrowing Options

Current capital resources and external borrowing and investment rates meant that Prudential Borrowing was not appropriate in 2004/05. However, with the introduction of capital receipts pooling, the potential need to fund Decent Homes and the resource needs for the Council’s priority leisure centre, the position will be reviewed throughout 2004/05 and for future budgets.

Revenue Contributions

An authority may finance capital expenditure directly from its revenue accounts, or from reserves or earmarked funds, which also technically counts as revenue contributions. In addition from 1st April 2001 authorities that operate a Housing Revenue Account are required to charge a specified sum known as the Major Repairs Allowance (MRA) to their Housing Revenue Account for the purpose of financing major housing repairs.

Waverley operates the following revenue funds within its General Fund:
Revenue Reserve Fund
Capital Fund
Vehicle Renewals Fund
Matched-Funding Provision Revenue Reserve Fund The Revenue Reserve Fund was established in 1977 to be used for any revenue purpose including revenue contributions to capital expenditure. In practice, for many years it has been Waverley’s main source of financing the General Fund Capital Programme. Advances from the fund are treated as internal borrowing with repayments made over appropriate periods. Until 1998 interest at the prevailing rate was also charged to the General Fund and credited to the Revenue Reserve Fund, which enabled the resources available within the Fund to increase and major capital schemes to be undertaken. However, by 1998 the total revenue contributions / repayments to the Fund were approaching 2 million and, in view of the severe national constraints on revenue expenditure, the Council took the decision to discontinue interest payments to the Fund. At the same time the repayment periods for principal were adjusted to the periods currently used for the various asset types. In line with the decision to discontinue interest payments, the Council recognised the funding of capital schemes would need to be within the long-term level of repayments to the Fund. The amount of this funding is reviewed periodically and is now in excess of 1 million pa. However, the actual repayments made to the Fund will vary from year to year as old schemes fall out; and repayments are implemented for new schemes.

The Council decided to credit interest on the balance of the Revenue Reserve Fund to the General Fund from 1st April 2003. Previously, interest was credited to the Revenue Reserve Fund. Interest of usable housing capital receipts continues to be credited to the Revenue Reserve. Recently, the accumulated capital receipts held by the Council increased significantly resulting from the high level of sale of council house receipts, the abolition of Local Authority Social Housing Grant and slippage in the Capital Programme. This additional interest of approximately 1m allowed the Council to abate the capital expenditure contribution from the General Fund by 330,000 pa for the 3-year period from 2004/05. The balance at 1/4/04 is estimated to be 3.2million and Appendix 5 shows the projection over the next 4 years. Capital Fund The Capital Fund has been set up solely to finance capital expenditure, but otherwise operates on the same basis as the Revenue Reserve Fund. However, the Capital Fund is of a much smaller scale at 0.3 million. Vehicle Renewals Fund The purpose of the Vehicles Renewals Fund is to finance the replacement of Waverley’s fleet of vehicles on a planned basis. Contributions are charged to the General Fund and paid into the Fund to even the impact of the cost of new vehicles in any one year’s accounts. Purchases of vehicles are financed from the Fund. As most of Waverley’s services are provided by contractors, the vehicle fleet now consists of 6 vehicles. The fund balance was reduced to an acceptable level during the 2004/05 budget process, with the surplus balance being transferred to the Revenue Reserve Fund. At 1/4/05 the estimated balance is 41,000. Community Partnerships Fund (formerly Matched-Funding Provision) Waverley’s matched funding scheme was introduced in 1998 and each year it has helped a large number of organisations complete essential community capital projects in the borough, levering in over 6m of funds from other sources. However, few of the schemes are located in the Borough’s most deprived areas. This reserve was topped-up in 2003-04 to allow two years further funding for 2004/05 and 2005/06. Appendix 5 shows the current balance of the reserve and projections for the next 4 years. The future financial strategy for 2005/06 will need to assess whether and how this imaginative and well-used reserve could be funded in the longer term. Capital Receipts

Waverley has a property portfolio and capital receipts arising from this are an important element of financing of Waverley’s capital expenditure.

The main source of capital receipts is right-to-buy sales of properties within the HRA. These are in the region of 3-5million pa. Capital receipts also arise from sales of land and access rights within both the General Fund and the HRA. Appendix 4 shows the projected capital receipts balances over the next 4 years.

Ring-Fencing does not apply to capital receipts, so legally Waverley could use the capital receipts arising from right-to-buy sales to finance any General Fund schemes. However, Council policy is for these receipts to be used for Housing purposes; with 50% of the budgeted sum being allocated to HRA schemes and 50% allocated for affordable homes (LA SHG).

Currently, 500,000 pa of General Fund receipts are allocated for financing the General Fund Capital Programme. However, from time-to-time major capital receipts arise from Waverley’s Property Strategy and these provide an opportunity to supplement the Capital Programme. The major development that should generate a significant capital receipt is at East Street at Farnham.

Pressures/Constraints

The Local Government Act 2003 confirmed the Government’s intention to pool 75% of sale of council house receipts and up to 50% of other housing receipts. This will have a major limiting effect on Waverley’s ability to fund future capital spending from its own resources. However, the transitional arrangements will afford some temporary relief


CAPITAL EXPENDITURE

Capital Strategy & Asset Management Plan

Waverley’s Capital Strategy covers all aspects of Waverley’s capital expenditure and provides a high-level four-year plan of the Council’s investment priorities.

The Asset Management Plan has been developed to ensure that the Council takes a corporate and strategic approach to managing its corporate assets. It is designed to link asset management to continuing and improving service delivery.

Both the Capital Strategy and Asset Management Plan recognise the key role of capital investment in achieving delivery of Waverley’s corporate and service objectives, and seek to ensure that optimum benefit is obtained for the residents of the Borough from the limited available capital resources.

Maintenance v Investment (new schemes?)

A considerable proportion of Waverley’s Capital Programme represents capitalised maintenance of existing assets. For the General Fund this currently amounts to some 600,000 pa which is far from adequate. In the case of the HRA The Major Repairs Allowance is in the region of 3 million pa. In contrast, the Capital Programme also includes new schemes representing high-profile growth in service delivery. The Council has to balance the resources available between these varying demands.

The Council’s Executive prioritises capital schemes after receiving advice from officers and Overview Committees. The following criteria are used in the prioritisation process:

The extent to which a particular scheme achieves the Council’s key corporate objectives.

Investment that will improve service delivery, especially to achieve improvement plans following Best Value Reviews.

Investment required to maintain current service provision.

Investment that will lead to cost savings or income generation.

The level of community support for particular proposals.

Pressures/Constraints

Key Strategy issues for the capital programme:

Prudential Borrowing
Affordable Housing
Decent homes
Priorities v Non-priorities
Leisure provision
Improvements and maintenance of assets

Appendix 4 identifies the key pressures on the capital programme.

General Fund

Waverley’s General Fund Capital Programme includes schemes designed to deliver the service priorities for all of the Council’s services, other than HRA and LA SHG. These are set out in detail within the appropriate service strategies and summarised within the Capital Strategy under the headings of:

Corporate Services
Information Technology
Leisure Services
Planning & Building Control
Property & Development Services
Environmental Services

The General Fund Capital Programme is based on existing and expected resources and, therefore, is realistic and capable of being delivered within the timescale. However, it is regarded as a base-level Programme, which may be supplemented should additional resources be generated through the Council’s property strategy or through partnership funding opportunities.

Housing

The Housing Services' requirement for capital resources attempts to find a balance between the Council’s roles as:

Strategic Housing Authority for the whole of the Waverley area;

landlord for in excess of 5,000 dwellings;

housing enabler in the Waverley area and partner to Registered Social Landlords through providing Local Authority Social Housing Grant; and

partner to private-sector landlords and homeowners through providing House Renovation Grants.

The housing Capital Programme is based on the Council’s Housing Strategy Statement and Housing Investment Programme. These documents have been developed in consultation with tenants and a wide range of partners in the statutory and voluntary sector including the Government Office for the South East and the Housing Corporation. It takes into account the Council’s Corporate Strategy and service-related information such as the Tenant Participation Compact; the Housing Needs Survey, the Local Authority Housing Stock Condition Survey; and the Better Government for Older People Waverley Pilot Project.

Partnerships

The Council promotes partnership working in all the services it provides. As an incentive to other service providers in the Waverley area, the Council has earmarked a significant level of resources (currently 300,000 pa) for Community Partnerships Funding schemes. These resources are made available to service providers on the basis that they must provide at least 50% of the funding from sources other than Waverley Borough Council. This approach not only promotes crosscutting initiatives and partnership working but it also makes the best use of available resources. Waverley supports around 30 leisure, environmental and community schemes each year by the use of this fund. By 31st March 2004, the Council had agreed to support schemes delivering total value exceeding 6 million.??

Pension

The Council took the strategic decision, upon becoming Debt-Free, to use surplus set-aside monies to capitalise up to 50% of its pension back-funding contributions by 31st March 2004. This enables Waverley to make lump-sum contributions to the Fund from capital resources in return for a reduction in its annual contribution. This action is designed to assist the Council’s revenue position and achieve an effective return on the funds involved.

Waverley was able to take advantage of its Debt-Free status to use its surplus Provision for Credit Liabilities (PCL) for this purpose and there is specific Council authority for this action up to the limit of 7 million. The PCL is mainly derived from set-aside capital receipts and since Waverley became Debt-Free the only significant source of new set-aside capital receipts has been reimbursements of LA SHG payments from the Housing Corporation.

The maximum amount for which capitalisation direction was obtained was for 7million. 1.75 million was achieved in 2001/2, a further 1.75 million in 2002/3, with 3.5 million achieved in 2003/04.

With the Government abolition of LA SHG from 1st April 2003, the Council’s current funding source has been withdrawn. Whilst it is still possible to apply for a capital direction from the Secretary of State, the competing demand for capital resources in Waverley will make pension back-funding more difficult to achieve. It does, however, remain a very effective return on funds should resources become available. A review of alternatives will be considered as part of the 2005/06 Financial Strategy.

Consultation on Priorities

Waverley has been committed to consultation for many years and first carried out extensive consultation in 1994 to help shape its future Capital Programme. Consultation on capital schemes regularly takes place with Town and Parish Councils, other local organisations and user groups; and it has also been undertaken by questionnaires sent to households within the Borough; by holding public exhibitions; and by arranging focus groups.

Recently, the Council has undertaken a series of consultations on local priorities for The Community Strategy. These included: a large scale Partnership Event; a Town and Parish Council Event; and 22 Ward Meetings. Key priorities have emerged to influence Waverley’s forward Capital Programme.

Direct consultation with the public and other stakeholders is carried out in the early planning stages of major schemes, as evidenced by public exhibitions being held for the East Street, Farnham regeneration proposals and the possible leisure development in Broadwater Park, Godalming.

INVESTMENTS

Treasury Management Policy

The Council’s Treasury Management Policy was updated in February 2004. The Policy determines how Waverley’s investments are managed and defines approved limits for 2004/05.

Prudential Code Requirements

The New Prudential code for Capital Finance in local authorities requires each authority to produce an annual investment policy and a set of specific prudential indicators.

The Council’s policy remains robust and complies with good practice guidance. Security and liquidity are given priority over yield, although the highest yield is sought provided safeguards are in place.

What the investments are used for

The investments are held for two main reasons. Firstly, they are used to provide cash flow for Waverley’s short-term needs, eg. Precept payments. Secondly, they represent the cash behind Waverley’s funds, reserves and balances such as the reserved capital receipts. As these reserves are used to fund expenditure, the level of investments will reduce. The total investments held at 31 March 2004 was 27.3 million, of which approximately 20 million represents the revenue and capital balances and reserves and the balance of some 7 million is used to manage the day-to day cash flow.

Forecasts

Currently, all of Waverley’s investments are held for period of less than one year. As approximately 20 million of the investments represent capital and revenue reserves, a longer-term view can be taken on this proportion, taking into account the projected draw on these funds. With the new rules and guidance now available, external advice will be considered, particularly in relation to credit ratings.

Appendix 1

ESTIMATED MAJOR VARIATIONS IN GENERAL FUND REVENUE BUDGET OTHER THAN INFLATION

New Legislation
Y/N
2005/2006
’000s
2006/2007
’000s
2007/2008
’000s
Recycling
Y
?
?
?
Insurances
N
?
?
?
Contracts
N
?
?
?
Council Tax Revaluation
Y
?
?
?
Licensing Bill
Y
?
?
?
Pensions
N
?
?
?
Abatement of capital expenditure
N
330
RSG Transitional grant
N
110
Recycling grant
N
47
Total
The list will be developed during the budget process



GENERAL FUND REVENUE BALANCE


2004/2005
’000s
2005/2006
’000s
2006/2007
’000s
2007/2008
’000s
Balance at start of year
1,034
904
1,000
1,000
Transfer from Revenue Reserve Fund
96
Less – funding of revenue expenditure
60
Supplementary Estimates
70
Balance at end of year
904
1,000
1,000
1,000

Appendix 2

COUNCIL TAX

Council Tax Increases

2001-02
%
2002-03
%
2003-04
%
2004-05
%
2005-06
%
2006-07
%
Waverley
- Inflation
    - Legislation
      Sub-total
      3.8



      3.8
      2.5

      3.7

      6.2
      3.0

      6.0

      9.0
      3.0

      3.2

      6.2
      3.0

      ?

      ?
      3.0

      ?

      ?
      Surrey CC
      4.5
      11.4
      17.9
      4.4
      ?
      ?
      Surrey Police
      4.6
      16.1
      40.1
      8.9
      ?
      ?
      Parishes (average)
      7.5
      9.7
      9.0
      2.4
      ?
      ?
      Overall Increase
      4.5
      11.2
      18.9
      5.1
      ?
      ?



      Funding of General Fund Revenue Budget 2004-05

      m
      %
      Redistributed NNDR
      3.2
      26
      Revenue Support Grant
      1.9
      15
      Balances
      0.3
      2
      Council Tax
      7.0
      57
      Total
      12.4
      100

      Appendix 3

      ESTIMATED MAJOR VARIATIONS IN HOUSING REVENUE ACCOUNT BUDGET OTHER THAN INFLATION

      2004/2005
      ’000s
      2005/2006
      ’000s
      2006/2007
      ’000s
      Reduced housing subsidy
      774
      ?
      ?
      Supporting people funding
      ?
      ?
      ?
      Maintenance of assets/Decent Homes
      ?
      ?
      ?
      Option Appraisal Costs
      80
      ?
      ?
      Total
      The list will be developed during the budget process



      HOUSING REVENUE ACCOUNT BALANCE

      2004/2005
      ’000s
      2005/2006
      ’000s
      2006/2007
      ’000s
      2007/2008
      ’000
      Balance at start of year
      754
      1,045
      1,045
      1,045
      Less – funding of revenue expenditure
      291
      Balance at end of year
      1,045
      1,045
      1,045
      1,045

      Appendix 4

      ESTIMATED MAJOR PRESSURES ON THE CAPITAL PROGRAMME

      2005/2006
      ’000s
      2006/2007
      ’000s
      2007/2008
      ’000
      Maintaining assets
      ?
      ?
      ?
      Information technology
      ?
      ?
      ?
      Implementing Electronic Govt.
      ?
      ?
      ?
      Community Partnership Fund
      ?
      ?
      Social Housing
      ?
      ?
      ?
      Decent Homes
      ?
      ?
      ?
      Leisure provision in Godalming
      ?
      ?
      ?
      Improvements in other leisure facilities
      Total
      The list will be developed during the budget process


      ESTIMATED CAPITAL RECEIPTS–GENERAL FUND & HOUSING REVENUE ACCOUNT

      2004/2005
      ’000s
      2005/2006
      ’000s
      2006/2007
      ’000s
      2007/2008
      ’000s
      General Fund balance at start of year
      1,700
      1,270
      870
      470
      Usable receipts in year
      100
      100
      100
      100
      Less financing of capital programme
      530
      500
      500
      500
      General Fund - Balance at end of year
      1,270
      870
      470
      70
      HRA Balance at start of year
      13,400
      9,794
      7,968
      5,448
      Usable receipts in year
      3,400
      2,300
      1,700
      1,100
      Less financing of capital programme
      7,006
      4,126
      4,220
      3,200
      HRA - Balance at end of year
      9,794
      7,968
      5,448
      3,348
      Overall Total
      11,064
      8,838
      5,918
      3,418
      Notes:
      Estimated receipts in 2004/05 include those from land sales associated with the Kilnfields development
      No estimate is included for the East Street development capital receipt

      Appendix 5

      GENERAL FUND REVENUE RESERVE FUND

      2004/2005
      ’000s
      2005/2006
      ’000s
      2006/2007
      ’000s
      2007/2008
      ’000s
      Balance at start of year
      3,265
      2,885
      2,205
      1,525
      Add – net contributions to fund
      1,500
      1,200
      1,200
      1,200
      Less- abatement of capital expenditure
      330
      330
      330
      0
      Less – funding of revenue expenditure
      250
      250
      250
      250
      Less – funding of capital expenditure
      1,300
      1,300
      1,300
      1,300
      Balance at end of year
      2,885
      2,205
      1,525
      1,175


      MATCHED FUNDING RESERVES

      2004/2005
      ’000s
      2005/2006
      ’000s
      2006/2007
      ’000s
      2007/2008
      ’000s
      Uncommitted balance at start of year
      600
      300
      0
      Add – contributions to reserve
      0
      0
      ?
      Less – funding of capital programme
      300
      300
      ?
      Balance at end of year
      300
      0
      ?
      Comms/Exec/2004-05/080