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APPENDIX 1 (Appendix 2 below)

Changes To The Budget Proposals Since The Council Executive 11th January 2006

1. THE ISSUE

2. THE REPORT

A8 The Government has not yet announced the final financial settlement or the Dedicated Schools Grant (DSG).

A8 The Resources Director has reviewed and approved the Council Tax Base for 2006/07 and the Collection Fund Surplus/Deficit for 2005/06 (as at 15 January 2006). The Council Tax base has been adjusted slightly to take into account projected student exemptions, growth in the tax base and the factor to cover the Council for changes in the provision for bad and doubtful debts and changes in the level of discounts and exemptions.

APPENDIX 2

CAPITAL PROGRAMME REVIEW: INTERIM REPORT

1 THE ISSUE

1.1 The Council, at its meeting of 17th November 2005 approved the terms of reference of a review of the current capital programme.

1.2 The key objectives of the review are:

1.3 The Terms of Reference of the review of the Capital Programme to address these objectives are:

1.4 This report sets out the interim outcomes of this short review focussing on its financial impact in 2006/07 but it is proposed to continue the review as set out in paragraph 4.6.

2 RECOMMENDATIONS

The Council Executive is asked to:

2.1 Recommend the adjustments in the current indicative capital programmes for 2006/07 to 2008-09.

2.2 Note the continuing work on the Capital Programme Review due to be reported in the June meeting of the Council Executive.

3 SUMMARY FINANCIAL IMPLICATIONS

3.1 These are contained in Section 4 of the Appendix.

4 THE REPORT

4.4 These resolutions and advice remain valid.

4.5 The Council approved a review of the Capital Programme on 17 November 2005. Directors Group agreed a more detailed terms of reference in early December. In the short time available, a pragmatic approach has been taken to the review. The immediate focus is on those issues affecting the budget for 2006/07 and future years.

Ownership of capital budgets, communications, and accuracy in the phasing of costs. Savings of£600k have been included in the revenue budget from rephasing but there may still be some "optimism bias" in the projections.

Processes for developing the programme (capital spend and capital receipts) need further improvement, in particular options appraisal and developing evaluation criteria for initially prioritising schemes for Member consideration. These both need to be set within an officer/Member focus for developing the programme (e.g. Capital Strategy and Asset Management Group), taking a strategic view of the programme (e.g. Project Programme Board) and decision making (the Council Executive and Council).

The level of unsupported borrowing underpinning the programme. While this report proposes taking steps to reduce this on the current Capital Programme further bids on unsupported borrowing will increase unsupported borrowing and/or the need for capital receipts. Without reductions in the Capital Programme or a further increase in capital receipts the Council's unsupported borrowing could increase beyond the£29m in the proposed Capital Programme. The capital financing costs for unsupported borrowing up to 2008/09 may reach a significant proportion of the current non-schools budget. In the present tight council tax regime, and particularly given the pressures on the revenue budget, this cannot be sustained.

The above would suggest a dual policy of moderating spending expectations and increasing and accelerating capital receipts. The second phase of the review will need to consider whether the first call on additional capital receipts must also be to reduce unsupported borrowing and if in future the revenue effects of such prudential borrowing should be met from service revenue budgets in order to allow prioritisation of spend between day-to-day services and the cost of borrowing. In the instance of "development" projects it is proposed that revenue costs are prioritised against financial plan targets for services i.e. the Council reduces budgets for lower priority services to fund the revenue effects of "development" or other projects according to priority.

The Council needs to improve its overall consideration of value for money with both revenue and capital budgets. This includes not just benchmarking fees and construction costs but on the "development" projects to evaluate the economic value (in its wider sense) to be achieved for the investment. This relates back to developing options appraisal.

Links to corporate priorities - the current programme is attempting to meet a multitude of ambitious objectives at the same time - the Spa, maintenance backlogs, school places, EPHs, development projects and housing needs. Future capital investment needs add to this, for example, further resources for development projects including transport while continuing maintenance, relocating/developing waste facilities, and WorkSMART. One way of addressing this is to consider these needs over a more realistic timescale of around 10 years.

Affordability - the balance between the revenue and capital budgets needs to be re-aligned, and a sound mechanism put in place to ensure prioritisation between capital and revenue in the future.

The balance between maintenance and new projects/new build; and

The accuracy in the phasing of scheme costs.

4.8 These issues will be addressed by continuing the review. The Capital Strategy and Asset Management Group will be tasked with producing recommendations to deal with these for June meeting of the Council Executive.

4.9 This initial report focuses on:

increasing capital receipts to make up for falling housing capital receipts.

how the current Capital Programme can be amended to ensure greater affordability and achievability.

4.10 Appendix 3 (The Draft Budget Proposal) reflects the proposals in this report as well as the consideration of new capital programme priorities.

Increasing Capital Receipts

4.11 The budget for 2006/07 assumes £15m of receipts to reduce unsupported borrowing on the current programme and which remains uncertain. A temporary fallback position has been identified should alternative receipts need to be identified and achieved during 2006/07. If this is not achieved, the revenue budget will increase by£1.4m in 2007/08 putting further pressure on services.

4.12 The capital budget (and consequent revenue budget) has been adjusted for capital receipts targets as shown in Table 1:

TABLE 1: Housing and General Capital Receipts Targets 2006/07 to 2008/09

4.13 The Head of Property and Legal Services and the Resources Director have evaluated the achievability of this level of receipts in order to agree the Council's budget. The Head of Property and Legal Services is also investigating the achievability of a higher level of receipts although this must be viewed alongside the Commercial Estate Options Review. At£5.2m p.a. ongoing this is considered a tough target. The outcomes of the review of additional receipts inform capital planning for 2007/08 onwards. At that stage the Council will need to carefully balance the use of any additional receipts between:

the need to reduce unsupported borrowing to fund the current programme, unavoidable costs and key priorities;

the continuing risks in the current programme;

service needs for capital in priority areas; and

"Development" projects.

4.14 There is a strong case for limiting the Capital Programme in 2006/07 in the context of having such an ambitious programme in a possibly unrealistically short 3-5 year period. In addition, as reported in January 2005, the programme contains major risks (Spa, Spa Claims, CDSM, other major projects) which if they crystallise will be difficult to contain due to the level of unsupported borrowing for other committed schemes and projects.

4.15 The Council will also need to support the achievement of more ambitious capital receipts targets.

Adjusting the Current Programme

4.16 Table 2 in this report contains the proposed adjustments in the programme and/or where the services can or should look to find resources within their revenue budgets to fund the ongoing costs of unsupported borrowing.

4.17 Directors and Executive Members have considered opportunities to reduce the current Capital Programme to reduce unsupported borrowing and to ensure re-prioritisation against new priorities.

4.18 In carrying out the review the basic criteria used have included:

Retaining schemes that are subject to government funding (supported borrowing and grants) or third party funding on the basis that future funding could be reduced.

Retaining schemes that are committed or nearly committed.

4.19 In addition to the adjustments in Table 2, it is proposed to:

Delete the remaining budget in 2005/06 for Headroom Creation of£1.2m (including slippage from 2004/05) on the basis that such proposals should generate savings/income to cover the capital financing costs of any related capital investment.

In line with the Resources Director's recommendations on capital contingency the£7m in 2008/09 has been reduced to £0.5m to make a total contingency of £5m which is funded. Major projects include contingencies of£34m for CDSM and £5m for other projects. The remaining £10m contingency is not funded.

4.20 Arising from the review of the phasing of schemes a reduction of £600k in capital financing costs has been included in the revenue budget proposals for 2006/07.

4.21 The first phase of this review is also proposing reductions in the capital programme of £1.2m in 2005-06, £5.1m in 2006/07, £4.7m in 2007/08 and £7.4m (including a £6.5m reduction in the contingency) in 2008/09.

4.22 The savings from these adjustments are before any additions to the capital programme in 2006/07 and future years.

4.23 The net revenue budget saving in relation to the proposed adjustments to the Capital Programme in Table 2 and proposed additions to the programme are contained in Appendix 3, Annex 4:

4.24 It is proposed that the net savings from the adjustments to the current capital programme and new schemes adopted in future years be added to reserves each year - £251k in 2007/08 and £473k in 2008/09 (a total of £724k) to cover the exceptional risks identified by the Resources Director. This is in addition to the £400k p.a. contribution to reserves already built into the Financial Plan 2006/07 to 2008/09. This makes contributions to reserves of £1.924m over the 3 year period.

5 RISK MANAGEMENT

5.1 A risk assessment related to the issue and recommendations has been undertaken, in compliance with the Council's decision making risk management guidance.

6 RATIONALE

6.1 The rationale of the review is explained in Section 1 of this Appendix (2) in terms of its objectives and terms of reference. The rational of this part of the review is to limit the Council's further commitments within an ambitious capital programme while capital resources are falling.

7 OTHER OPTIONS CONSIDERED

7.1 Options were considered in terms of reducing or not reducing particular schemes or programmes.

8 CONSULTATION

8.1 The proposals have been discussed by the Directors Group and Executive Members and will feature as part of the budget/service plan consultations. The Resources Overview and Scrutiny Panel will be considering these proposals as part of the overall budget at its meeting on 9th February 2006.

9

9.1 The issue is part of the Council's budget and Council Tax setting process.