Meeting documents
Cabinet
Wednesday, 7th September, 2005
Appendix 1
Financial Planning Issues
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 alongside a target of Council Tax rises in line with the government guideline. The Corporate Plan when agreed in 2004 anticipated the availability of financial headroom for investment in improvement priorities for 2006/07 but when the Plan was formally reviewed in February 2005 a number of changes meant that this was replaced by a projected deficit of £1.1M. Council noted that the Executive had accepted the need to develop proposals for achieving affordable revenue budgets. The existing Plan position is described in Section 2.
b) There are also other issues that have arisen since the last Review in February, some of which were known (e.g. single status) and some of which are national issues, such as the formula grant review being undertaken for implementation in 2006/07 which could lead to a significant loss in Government grant to this authority. The monetary effects of this upon Bath & North East Somerset are also shown in Appendix 2. These issues are discussed in Section 3.
d) Section 4 discusses the
strategic approach adopted to achieve a balanced and robust financial plan for 2006/07 and beyond. Due to the uncertain situation and pressures outlined in Section 3, the approach is based on tackling a revenue deficit of up to £2.5M and comprises a number of strands:
Generation of additional capital receipts
Raising additional income
Attaining greater organisational efficiency
A schools' strategy responding to the new national funding arrangements
Mitigating the financial effects of the single status agreement
Maintaining overall financial discipline on both revenue and capital expenditure
No options will be easy to implement, but difficult choices will be needed if Council Tax increases are to be kept to acceptable levels in 2006/07. Considerable discipline will be needed if Services are to achieve their targets which are extremely challenging as a result of their need to absorb spending pressures such as rising pension contributions and single status. Current projections indicate that individual initiatives will generate sufficient savings to meet the deficit in the published financial plan but there still remains a significant gap towards the suggested target, with the likelihood that the gap can only be closed materially by a substantial programme of capital receipts.
2) The Current Financial Plan
The Council has a well-established rolling medium-term financial planning process that now forms an integral part of its overall Corporate Plan. The Corporate Plan put forward a financial strategy in order to focus resources on the Council's Improvement Priorities alongside a target to set annual Council Tax rises in line with the government guideline. Both the Corporate Plan and Financial Plan are underpinned by individual Service & Resource Plans.
a) When the Corporate Plan was agreed in February 2004, the original Financial Plan Assumption for 2006/07 was as follows:
|
Where the Money was coming from (£) |
Where the Money was planned to go (£) |
||
|
Tempering of growth in education and social services |
1.3M |
Headroom for investment in improvement priorities |
1.6M |
|
Service Savings |
0.5M |
Waste - growth |
0.3M |
|
Unallocated Council-wide Savings |
0.3M |
Inflation - Services |
0.9M |
|
Reduction in contribution to balances to £400k |
0.3M |
Growth - Education & Social Services |
6.8M |
|
Other |
0.2M |
Increased Capital Financing Charges |
1.6M |
|
2.6M |
11.2M |
||
|
Net Increase |
8.6M |
||
|
Funded by: |
|||
|
Increased Grant |
4.4M |
||
|
Increased Council Tax (assumed to increase in line with government guideline) |
4.2M |
||
b) When the Plan was formally reviewed by Council in February 2005, the Financial Plan was updated for the following items:
|
£ |
£ |
|
|
Original Headroom Expectation for 2006/07 |
1.6M |
|
|
Less |
||
|
Planned Use of Headroom for Customer Access - Contact Centre Roll-Out |
-0.4M |
|
|
Extra Capital Financing Charges (higher interest rates plus extra capital spend) |
-1.2M |
|
|
Schools - Expected change in national funding arrangements |
-0.7M |
|
|
Western Riverside - assumed revenue contribution |
-0.5M |
|
|
Other Changes |
0.1M |
|
|
Sub-Total |
-2.7M |
|
|
Financial Plan Deficit projected for 2006/07 (as shown in published Financial Plan) |
-1.1M |
c) In receiving the updated Financial Plan, full Council resolved to 93note, in view of the projected financial planning shortfalls for 2006/07 and 2007/08, the Executive has fully accepted the need to develop proposals for achieving affordable revenue budgets in those years, and will focus its attention over the next 12 - 18 months on the following:
generating substantial additional capital receipts, to reduce the need for unsupported borrowing while protecting the income received from the Council's assets
driving a programme of efficiency initiatives, with specific consideration of the potential savings to be achieved from:
D8 restructuring of the Council and its Services
D8 amalgamation of specialist functions to achieve greater economies of scale and reduce management overheads
D8 mainstreaming of centrally-provided functions
D8 critical review to ensure the viability of trading activities
D8 market testing of activities where there is established private and voluntary sector provision of services to local government
D8 greater joint working with partners to achieve mutual benefits from economies of scale and removal of duplication
D8 re-engineering to streamline office processes
ensuring opportunities for income generation are maximised
conducting a pilot 93zero-based budgeting94 exercise in Social Services
ensuring the managers critically review the need to recruit to posts as they become vacant
reducing the scope or standard of services where these are demonstrated not to contribute significantly to Improvement Priorities or statutory requirements94
An update on progress on these items is given in Appendix3.
d) When considering the existing Financial Plan, it is important to recognise that the plan already contained significant service savings targets totalling£1.6m in 2006/07 and £1.5m in 2007/08:
|
Service Area |
Savings Target 2006/07 £000 |
Savings Target 2007/08 £000 |
|
Education (non schools) |
79 |
79 |
|
Social Services (93tempering of growth94) |
571 |
571 |
|
Other Council Services |
659 |
580 |
|
Corporate (i.e. not allocated to any individual Service) |
300 |
300 |
|
Total |
1609 |
1530 |
3) Issues - Uncertainty and Pressures
a) National Context
The ODPM & DFES have issued consultation papers in July 2005 outlining the changes they are proposing for 2006/07. The combination of possible changes for 2006 means that the national position is extremely uncertain. This can be seen in the exemplifications listed in Appendix 2 which give best and worst case scenarios, which vary from a gain of£4.3m grant to a loss of £4.6m, or a variation of nearly £9m.
The consultation papers cover
i) Changes to schools funding including
A ring-fenced Dedicated Schools Grant to replace funding through Formula Spending Share(FSS)
Merging of most special grants for schools into a Single Standards Grant
Three-year budgets for schools aligned to the academic year
A stronger role for Schools Forums
ii) An alternative grant system (moving away from notional measures of grant and council tax)
iii) 3 year settlements - it was thought that 2006/07 would herald the introduction of 3 year financial settlements. The Government has now announced that the 2006/07 settlement will also include indicative figures for 2007/08, so will only represent in effect a 2 year settlement. However the next three year cycle will start with the 2007/08 financial year when figures will be revised for Council tax revaluation and any other significant data changes.
iv) Changes in Formula Spending Shares (FSS)
These include possible changes in all the FSS blocks, including the LEA blocks, Children's and Adults Personal Social Services, Highways and Environmental Protective & Cultural Services (particularly for concessionary fares), capital financing and area cost adjustment. The suggested changes were issued in a consultation paper on 19th July and will be examined in more detail separately and responded to by the Executive Member (Resources) in time for the October deadline. Areas of concern include the following areas:
Changes to all areas of Personal Social Services FSS, particularly Younger Adults.
Changes to the Area Cost adjustment.
Further resource equalisation and redistribution of grant to lower tax base authorities.
No decision will be made on which options are chosen until late November, so it is still difficult to ascertain what the overall position will be. The effects of various options are contained in Appendix 2.
v) Formula Grant Changes
There are potential technical changes to grant methodology. This is also included in the analysis in appendix 2. If the worse case scenario did happen, then the authority's grant would be subject to floor protection for the coming years. Overall this would magnify any problems in 2006/07 significantly. Grant increase could be as low as 2.5% excluding Education which would be a £2.1-£2.4m shortfall on plan projections (or approximately 4% on Council tax).
vi) It is also uncertain whether there will be a continuation of 93one-off94 government grant from 2004/05 and 2005/06. If this were not consolidated into the Council's grant for 2006/07 the effect would be a potential loss of grant of£1.3 million (or just over 2% on Council Tax).
b) Local Issues which are nationally driven
There are also pressures within future budgets where no specific provision has been made in the plan and there are assumptions that these will be absorbed within Services, notably:
§ Single status - the cost of which will impact mainly on Social Services, Operations and schools, but could be very significant and therefore not containable within those services in the short term. This is being examined in detail by Directors Group, but current proposals are to contain any increases within the overall revenue budget.
§
§ Pensions - additional costs of c£0.8M pa will arise as the employer's contribution increases by 1.8% as part of the 3-year phased implementation of the actuarial assessed rates. In addition the current revocation of the 2005 regulations by the Secretary of State add a potential £800k pa to our cost base.
§ Social services - the Plan assumes that the Council is able to 93temper growth94 in 2006/07 and 2007/08. Current signs are that this is a reasonable planning assumption although experience indicates that there is a significant risk that cost pressures, service demand and national targets combine to undermine it. This is a national problem, and one which locally we are doing our best to deal with, but which cannot be locally controlled. The Member Working Group has also continued its activity in the current year to focus on the adult care budget, as this is a high risk area.
§ Service pressures - the Plan assumes an increase in waste management budgets of an approx £300k pa for increased volumes which arise from increasing levels of waste in a modern society, and from increases in landfill tax and recycling. Depressed visitor numbers have also resulted from current national problems, and could mean that Heritage Services budget surplus targets will be severely strained
§ Inflationary pressures, particularly with regard to fuel costs. Potential increases of 50-100% are being flagged up and since the authority spends £2m a year (including schools) on energy, the potential impact of this is significant
c) Local Issues
Major projects - the Plan assumes no further increase in cost beyond the£2M pa contingency. This is examined in more depth in the next paragraph (section d).
§
§ Desire for genuine headroom to allocate resources to priorities. On current indications, this will require a significant increase in cost savings and/or service reductions to achieve.
§ Balances - following the outturn for the 2004/05 financial year approved in June 2005, current general fund balances are £5.8m, against a target of £7m. Since then Council has agreed further releases from balances totalling £290,000. The latest monitoring report is predicting an overspend in the current year of £565k (0.33%), although it is believed that much of this will be righted before the year end. The 2006/07 financial plan allows for a further contribution to balances of £400k and as long as this is not reduced or any further money allocated in 2005/06, balances will remain roughly on track.
d) The Capital Programme
The current financial plan includes financing for a total capital programme of £49M in 2005/6 and £33M in 2006/7. Funding sources for such a programme assume non-housing capital receipt generation of £4M in 2005/06 and £1.5M in 2006/07 and unsupported borrowing of £26M in 2005/06 and £8M in 2006/07.
Each £1m of unsupported borrowing at current assumed interest rates incurs a cost to the revenue account of £95,000 pa (including provision for repayment of principal).
Current estimates of spending for 2005/6 are at around 85% of the programme, so this will afford some relief from repayment of debt in the current year. However, the programme has clear pressures
A slow down in right to buy sales means that the Council can not rely on more than£2m funding from this source. If the programme is not reduced accordingly, then a gap of around£4m pa will need to be bridged to enable the current programme to continue
The programme of school re-provision is under pressure, and whilst the Council have determined that any overspend on the schools programme will need to be supported from within the total schools programme, there are risks that this may not be achievable.
The programme of EPH provision has suffered some setbacks, mainly due to site specific issues. On current estimates, it is believed that the budget for the first home, Carrswood, should be sufficient, although the other two, Greenacres and Hawthorns are likely to be under severe pressure. A detailed assessment of the situation for these two homes is currently being undertaken, and a full report on the situation will be produced as soon as the review is completed. It should be remembered however, that a significant additional capital receipt, above that estimated, was received from the sale of Woodside EPH. Should it be necessary, this additional receipt could be made available to enhance the budget for the homes.
The programme for the Spa appears to be on track for completion in the spring within the current budget, but there remain risks that other problems could still emerge on this project, if only because of the significant time the building has not been in use.
Timescales for the Bath Western Riverside project have slipped, and if the Council wish to deliver an early masterplan, it may need to increase funding to support the project.
A contingency total of £20m was estimated to be needed to support the current programme. This figure remains a reasonable estimate, but it is not cash backed within the programme, which contains a funded sum of£2m pa only for this.
General Capital receipts of £4M in 2005/06 and £1.5M in 2006/07 have been planned. It is likely that this figure will be exceeded in 05/06 by around£1m but will need to be enhanced by £4M in 2006/07 just to compensate for the downturn in Right to Buy receipts, unless the overall programme is reduced by an equivalent amount. In order to deliver such large sums, a clear programme of disposals will be needed.
Interest rates - the financial plan assumed an interest rate of 5.5% for 2006/07. It is increasingly likely that rates will be lower as current rates have now reduced to 4.5%, If a rate of 4.75% is assumed for 2006/07, the financial plan saving would bec£500k. This will relieve some pressure on the overall Plan.
4. Strategy to Bridge the Gap in 2006/07 and beyond
The current Financial Plan shows a deficit of £1.1M for 2006/07 (see section 2b above) and a further £1.1m for 2007/08, or a cumulative £2.2m deficit in 07/08. However, due to the uncertain situation and pressures as outlined in Section 3, officers have been developing a strategic approach based on a likely deficit of up to £2.5M, and depending on the outcome of some of the above factors, this may need to be increased. The strategic approach, which has been fully discussed with the Council Executive informally and which encompasses those actions included in the Council resolution (Section 2c), now needs to be formally endorsed.
a) The first part of the strategy is to generate additional capital receipts which do not adversely affect income streams and which can therefore be used to reduce our borrowing and thereby reduce the burden on revenue.
A number of potential initiatives are being looked at. These were all included in the briefing given to all Councillors in May 2005. These included options such as bringing forward development opportunities in the Commercial and Corporate Estates, including alternative financing and management arrangements for the Commercial Estate. Also there are ongoing investigations into the future use of some operational assets and the possible restructuring of the Council's Right-to-Buy sharing agreement with Somer, although current reductions in right to buy sales makes this option less attractive. No decisions have yet been made on any of these and any decision taken would need to demonstrate 93added value94 in the longer term to the Council before if it is to be taken forward. In addition, most of these initiatives cannot be completed within a short timescale, and in the meantime, it will be necessary to reduce or defer some of the capital spending until receipts or other funding sources are more certain.
b) The second part of the strategy is to raise additional income. This has to be considered carefully, as the Council may not wish to simply pass on taxation to the public in another guise. Areas being considered include Planning fees, where the Government has recognised that current fees do not reflect Council costs, particularly for large developments, Car parking charges which were due for review in 2006/07 anyway having been frozen in the current year and in other areas of discretionary services where the Council could charge but currently do not; or where we could recover the full cost of a service but currently do not. Each initiative considered will be progressed by a feasibility study.
c) The third area is organisational efficiency. Although great play has been made nationally about 93Gershon94 savings targets, this Council already had a much longer track record of delivering efficiency savings as efficiency targets have been built into service plans since the Council's formation and formally in its financial plans since 2000/01. In fact the planned level of efficiency savings being made this year, significantly exceed the Government's targets spelt out by Gershon. The Council includes efficiency as a key plank of its financial plan and continues to look for efficiency, introducing specific projects such as WorkSMART and Back Office Review to help facilitate better use of our assets. These changes have to be made alongside the development of the Council's organisational culture, and are unlikely to be capable of gearing up to deliver additional savings in the short term.
d) Fourth, to build on the current constructive working relationship with the Schools Budget Forum and to develop a strategy, notwithstanding the future ringfencing of schools budget, to support the Council's Improvement Priority of improving the environment for learning and our responsibility as property owner to ensure suitable quality accommodation and elimination of maintenance backlog. This will enable the Council to use the discretion available to it under the proposed national funding arrangements to:
Produce savings of approx £400k pa to the Council Taxpayer over the period 2006/07 - 2008/09, relieving pressure on the taxpayer by around 0.67% pa.
Maintain school revenue spending at a level slightly above SFSS, enabling schools more time to adjust to the new arrangements and to absorb pressures, notably workforce reform. By 2008/09 the DSB would be reduced to approx 1% above the converged SFSS level - equivalent to around£47 per pupil
Generate capital resources for investment via prudential borrowing of£9M over the 3 year period
It should be noted that the strategy is subject to the extreme uncertainty regarding the implementation of the new funding arrangements
e) For single status, the current timetable indicates implementation by 31st March 2007. Negotiations are continuing with the Trades Unions regarding pay modelling and implementation arrangements. A range of negotiation actions are being considered by Directors Group with a view to contain any pay increases within the overall revenue budget.
f) The Executive has been working up these options with the Directors Group since the start of 2005. No options will be easy to implement, but difficult choices will be needed if Council Tax increases are to be kept to acceptable levels in 2006/07. In addition to these specific options there is continuing work within Services to deliver their existing financial plan targets together with some new ones which respond to the areas that Council required services to investigate. Considerable discipline will be needed if Services are to achieve their targets which are extremely challenging as a result of their need to absorb spending pressures such as rising pension contributions and single status.
g) This strategic approach and individual initiatives are being regularly reviewed by Directors who monitor and track an action plan. By the early autumn they will be clear on how & when individual initiatives are to be implemented, and what they will deliver in financial savings and or receipts. The current projection is that savings from the schools' strategy, lower interest rates and specific initiatives will generate sufficient to close the gap in the published financial plan but there still remains a significant gap towards the suggested target. Given the short timescales and potential impact of a sharp increase in savings targets on service levels, the likelihood is that the gap can only be closed materially by a substantial programme of capital receipts. The Executive is asked to endorse this strategic approach and to confirm a planning target of £2.5M of savings for 2006/07
Update on Progress on Council's Budget Resolution February 2005
|
Council Resolution Action |
Progress to date |
|
generating substantial additional capital receipts, to reduce the need for unsupported borrowing while protecting the income received from the Council's assets |
As detailed in the report appendix 1, point 4 (a) |
|
driving a programme of efficiency initiatives, with specific consideration of the potential savings to be achieved from: |
|
|
restructuring of the Council and its Services |
Council received a report on this in July 2005. |
|
amalgamation of specialist functions to achieve greater economies of scale and reduce management overheads |
Considered within reorganisation proposals, but unlikely to generate significant savings in short term. |
|
mainstreaming of centrally-provided functions |
|
|
critical review to ensure the viability of trading activities |
Reviews have been undertaken in school meals and transport and a review is ongoing of the Housing Advice function. |
|
market testing of activities where there is established private and voluntary sector provision of services to local government |
|
|
greater joint working with partners to achieve mutual benefits from economies of scale and removal of duplication |
Considered within reorganisation proposals. In particular joint working with the PCT was included in the recent report on Council reorganisation presented to Council in July. |
|
re-engineering to streamline office processes |
An invest to save project in Social Services has been agreed and is now in progress. A re-engineering team has been formed in house to assist in implementation of new systems. WorkSMART project business case currently being drawn up to implement more efficient ways of working. |
|
Council Resolution Action |
Progress to date |
|
ensuring opportunities for income generation are maximised |
A review existing Council charging policy is being undertaken base data is being gathered. Some particular opportunities in car parking and planning are being looked at in advance of this (as mentioned in the report). |
|
conducting a pilot 93zero-based budgeting94 exercise in Social Services |
This is currently being undertaken in Older People's Services with reporting of recommendations to the Adult Services Member working group in November. |
|
ensuring the managers critically review the need to recruit to posts as they become vacant |
This is being undertaken in all services. |
|
reducing the scope or standard of services where these are demonstrated not to contribute significantly to Improvement Priorities or statutory requirements94 |
This is being considered within services to meet existing savings targets. Further work will be undertaken in looking at service plans for 2006/07. |
Proposed Budget Process to revise the Council's financial plan and set 2006/07 Revenue & Capital Budget
|
Phase |
Activity (and update) |
|
January 2005 |
First consideration of 2006/07 situation by informal Executive and Directors. Directors Group draws up a long list of actions and starts to work up more detail on each to prioritise list. |
|
March 2005 |
Short list drawn up of potential actions by Director Group for consideration of Executive. Actions agreed and work initiated on the list. |
|
May 2005 |
Briefing note distributed to all Councillors on the situation and the actions being considered to bridge the budget gap in 2006/07. Note issued in May 2005. |
|
Summer 2005 |
The Chief Executive is attending separate meetings with each political group in order to discuss the budget process in more depth. Councillors asked to identify the key issues that they wish to be involved in, and how they wish to be kept informed. |
|
August 2005 |
Consideration by Exec Member (Resources) of any changes to budget consultation and publications as recommended by the Resources Overview and Scrutiny panel. |
|
September 2005 |
Executive to consider this report, formally register actions being looked at and agree timetable. Letter to be sent from the Executive to all O&S panels to invite them to participate in the scrutiny and evaluation of service plan and service budget changes for 2006/07. First meeting of Corporate Plan Member Working Group (a group containing both executive and non-executive councillors with trade union observers that has responsibility for overseeing the Corporate Plan and Financial Plan Review). |
|
Phase |
Activity (and update) |
|
October 2005 |
Issue of Guidance for 2006/07 service planning following Executive and Directors' review. Consideration by the Executive of first phase of budget changes required to breach 2006/07 deficit e.g. income changes. |
|
October 2005 |
Start of review/revision of Corporate Plan Improvement Priority Plans led by sponsor Directors with Executive Members and Heads of Service (HoS), to identify progress to date and to ensure that plans are clear and focused on actions and outcomes that are challenging but realistic given likely resource constraints. |
|
Late Nov |
Provisional Grant settlement for 2006/07 |
|
January 2006 |
Executive preparing draft corporate plan update and Budget, drawing info from Improvement Priority (IP) plans, draft service and resource plans and member working groups. (For Executive February 2006). Engagement with Overview & Scrutiny (O&S) panels, to address issues arising from the corporate plan review generally or from specific service and resource plans, to enable O&S comments to be fed into full Council. (NB: This was only carried out by the Resources Panel last year). |
|
February 2006 |
Presentation of corporate plan and financial plan update and Budget to Executive and then full Council. |
|
March/April 2006 |
Finalisation of Improvement Priority plans and Service & Resource Plans 93spring94 document for approval by Executive Members via the Weekly List |
|
March onwards |
Review of 2007/08 onwards position. Introduction of three year settlement figures from 2007/08. Council Tax Revaluation (by Central Government) |