Meeting documents

APPENDIX 2

Financial Planning Issues 2007/08 and future years

1. Executive Summary

a) The Council has a well established rolling medium-term financial planning process that forms an integral part of its overall Corporate Plan, focusing resources on improvement priorities whilst maintaining Council Tax rises within government limits. This report sets ways in which that process is being further refined, to incorporate an increased emphasis on value for money, and to enable Councillors to be more involved in developing the budget through a greater role for Overview and Scrutiny.

b) The government grant settlement for 2006/07 introduced multi-year settlements for the first time. The 2006/07 settlement also provided indicative allocations for 2007/08 with the government stating that "we do not anticipate making changes to the 2007/08 allocations that are announced with the final 2006/07 settlement". In setting the 2006/07 budget the council has already set an indicative 2007/08 budget and indicative council tax, as required. From 2008/09 the government intends to announce settlements for 3 years in line with the Comprehensive Spending Review timetable.

c) An initial review of the council's financial position has identified a number of additional pressures on the revenue budget and the financial plan has been updated to include an increase of £664k in the savings targets required in 2007/08 service delivery plans, in line with July Council decisions in relation to reserves, assumptions about the collection fund and tax base and Coroner's costs.

d) This Appendix highlights a number of other potential revenue budget pressures such as:

Single Status

Pensions

Social Services

Waste

Other service pressures including issues arising from current year monitoring

Potential changes in VAT

2. The Current Financial Plan

a) The Council has a well established rolling medium-term financial planning process that forms an integral part of its overall Corporate Plan, focusing resources on improvement priorities whilst maintaining Council Tax rises within government limits. Both the Corporate Plan and Financial Plan are underpinned by individual Service Delivery Plans. This report sets ways in which that process is being further refined.

b) When the budget for 2006/07 was agreed by Council in February 2006, the provisional budgets for 2007/08 and 2008/09 included small amounts of uncommitted revenue of £157k in 2007/08 and £102k in 2008/09. Both years assumed a target Council Tax increase of just below 5% in line with recent requirements to avoid capping. Some pressures were known and reported in February and others have developed since the last budget report, both are detailed below.

c) The government grant settlement for 2006/07 introduced multi-year settlements for the first time. The 2006/07 settlement also provided indicative allocations for 2007/08 with the government stating that "we do not anticipate making changes to the 2007/08 allocations that are announced with the final 2006/07 settlement". From 2008/09 the government intends to announce settlements for 3 years in line with the Comprehensive Spending Review timetable.

d) This means that the high level of uncertainty about the forthcoming year's financial settlement, faced by the council this time last year, is no longer the case. The Financial Plan figures for 2007/08 include the expected grant levels and council tax within the expected capping limit. While the assumptions will be updated for any changes that become known in December, this is not expected to be significant.

e) The expected levels of supported borrowing for 2007/08 have already been built into the financial plan but these assumptions are less firm, being described by government as `provisional', and will be reviewed as soon as further information enables this. In addition the government allocates capital grant (e.g. Greater Bristol Bus Network) outside of the annual financial cycle and so the size and financing of the capital programme is being kept under continuous review through the revised capital programme processes approved in July.

f) More fundamentally, the financial context from government for future years beyond 2007/08 will not be clear until the outcome of the next Comprehensive Spending Review. The December review of financial context will incorporate any emerging information available at that time.

g) As reported in previous financial planning reports, there are no specific provisions in the financial plan for the following future budgetary pressures which are expected to be absorbed by services:

Single Status - Officers are still in negotiations with the Trade Unions, the objective being to contain costs by introducing a package of offsetting changes in terms and conditions. No provision for additional cost has been made within the financial plan.

Pensions - 2007/08 is the third year of the 3 year phased implementation of the pension fund increases following the last actuarial assessment. This requires an increase in the employer's contribution rate of 1.8% orc£900k, which will need to be absorbed by services. There may also be further increases required in future years following the next triennial valuation.

Social Services - the plan assumes tempered growth in 2007/08 and 2008/09. Cost pressures predicted for 2006/07 meant that the tempering of growth was not achievable. Early forecast for 2006/07 spending suggest that cost pressures are still being experienced especially in Mental Health, Learning Difficulties and Independent Fostering Placement. These pressures will be assessed against financial planning targets as part of the Service Delivery Planning process but remain a high risk area.

Waste Services - A review and market test of waste collection services is being undertaken with new arrangements to be introduced from April 2007. Additional costs of operational vehicles replacement and harmonisation of staff will be offset anticipated efficiency savings. The service review will also formalise the response to compliance with the Landfill Allowance Trading Scheme, where the Council is required to reduce its disposal to landfill or purchase additional permits at greater cost. It is projected additional expenditure on new recycling services will partly mitigate the higher costs expected, but there will still be a rise in overall costs from the present position. This will be outlined in more detail and quantified in the Service Delivery Plan for Environmental Services.

Other Service Pressures - the 2006/07 first quarter budget monitoring report to this meeting highlights potential revenue overspends resulting from service pressures. The financial plan assumes that these pressures are addressed by the end of the financial year. Directors Group are currently working on this, each Director is reporting to Directors Group in September on proposed actions required to mitigate forecast overspends.

The European Commission (EC) has announced it wishes to promote harmonisation of tax rules across different member states. It will therefore propose a number of changes to VAT law which may impact certain Council services which generate income (e.g car parking & museums). The proposals are due for release and consultation in late 2006, with possible adoption in UK VAT law from either April 2008 or April 2009. Once announced the potential financial implications to the Council of the proposals will be assessed and the Council Executive will be briefed on the issues.

k) The current financial plan includes financing for a total capital programme of £44m in 2006/07, £30m in 2007/08 and £18.8m in 2008/09. Funding sources for such a programme assume non-housing capital receipt generation of £5.1m per annum and unsupported borrowing of £16m in 2006/07, £6m in 2007/08 reducing to £134k in 2008/09.

l) The capital programme also requires right to buy receipts of £1m per annum, current receipts in 2006/07 are projected to be ahead of this target, although any projection remains sensitive to changes in the housing market.

m) One of the main risks to the capital programme surrounds the potential requirement for match funding of potential schemes awaiting government approval (such as major transport schemes and Building Schools for the Future). These schemes also raise the issues of adequate resourcing in terms of staff capacity to deliver the projects. The new capital processes reported to the Council Executive in July will capture these issues and escalate significant risks to Projects Programme Board (PPB).

n) Waste Infrastructure - to facilitate development on Bath Western Riverside there is a requirement to relocate the Midland Road depot. The capital expenditure costs are expected to exceed the capital receipt in respect of the site, but economies will result from increased recycling potential and anticipated changes in disposal arrangements. An outline report on these arrangements was made to Council in February 2006 regarding the purchase of land at Pixash Lane. It is to be determined whether this capital expenditure is to be undertaken by the Council or its waste partner through higher contract expenditure (revenue).

o) A revised position on the corporate capital contingency was reported to Council on 13^th July 2006, following allocations to fund the Bath Spa Project to legal transfer and for the Spa Claims final account work. The following table shows the latest projections:

p) Interest rates - the financial plan assumes an interest rate of 5.0% in 2007/08 and 5.5% 2008/09. The current base rate now stands at 4.75%, our treasury management advisors are currently forecasting a further 0.25% increase to 5.0% around November 2006 due to inflationary pressures. The current financial plan assumptions are currently in line with this view and will be monitored as part of the budget setting process.

q) The budget report in February highlighted that the level of unsupported borrowing had been reduced following the first stage of the capital review, noting that the corresponding savings in the revenue budget (through reduced capital financing costs) rely on the Council and the Council Executive:

r) The guidance circulated for Service Delivery Planning has reiterated the stance that any new capital proposals should be fully funded.

s) The Executive agreed a revised Capital Planning Process in July, with the objectives of:

Strengthening corporate processes for project initiation and assessment of deliverability in order to ensure the projects are well founded, realistic and deliverable.

Strengthening corporate processes for capital investment planning to identify, prioritise and match resources to needs and ensuring value for money.

Strengthening corporate reporting processes to manage/co-ordinate the capital investment programme in terms of total scheme costs, phasing of costs, risks, emerging issues, contingencies and forward programme issues.