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ITEM CC8
Supplement

COUNCIL – 10 FEBRUARY 2004

REVENUE BUDGET AND CAPITAL PROGRAMME

PART (1)

COMMENTARY ON THE EXECUTIVE BUDGET PROPOSALS 2004/05 AND MTFP 2005/06 –2008/09

Supplementary Report by Head of Finance


  1. I have reviewed the Budget 2004/05 and the MTFP 2005/06 – 2008/09 proposed by the Executive to Council and have set out my views on the robustness of the estimates and the adequacy of the reserves and balances below. I would remind you that I have submitted a series of papers on the Budget to members which are badged reports placed on the green Budget and Oxfordshire Plan ring binder. Badged report A9 in the series, presented to the Executive on 14 January, contained my advice on reserves and balances and a risk assessment based on a wide range of factors including the robustness of the financial control environment and the systems of internal control.

    2. Inflation

  2. Firstly, I note that the Executive has allowed 3% inflation for pay and prices in the Schools Block of Learning & Culture. This appears sound because it forms a major part of the 4% minimum guarantee for schools required by the Secretary of State. The teacher’s pay award was 2.5% but the actual overhang from the 2003/04 award means that the full year effect is greater than this.

  3. The Executive has decided that it is likely that the Green Book pay award for Local Government employees will be 2.5% (in line with the teachers pay award) and that general price inflation should be set at 2%. The new measure used by the Government to measure non-pay inflation suggests that the increase for general prices is around 1.5% while the former measure which used the RPIX is running at 2.6%.

  4. This reduces the original inflation assumption by £1m (£0.650m for pay and £0.350m for non pay), which the Executive has put to balances. My view is that this is a prudent approach which allows members to decide whether to fund an above 2.5% pay award or to ask the directorates to absorb the difference. All contracted expenditure has been excluded. This mainly occurs in Environment & Economy and Social & Health Care. I highlighted (in my badged report A9 to the Executive) that I thought Directors should be asked to review their estimates for above average inflation. There is some £100m of non-pay expenditure in the budget where 3% inflation is awarded. While I accept that this has not been done in time for this Budget I am still recommending that this should be an area for focus in 2004/05.

    5. Service Estimates

  5. I note that the full costs of the job evaluation £2.4m have been added to the budget (some additional costs on Home Care Workers, around £0.600m are funded within Social & Health Care from the additional grant on Access and Capacity). There is £0.4m additionally in 2005/06 and 2006/07.

    6. Pension Fund Revaluation

  6. Further anticipated costs arising from the Pension Fund Revaluation, due in October 2004, are proposed for future years, £0.9m per annum from 2005/06 to 2007/08. This is the best estimate at this stage and I will report back with further advice in the autumn. This is a prudent acknowledgement of the possible increases.

    7. Schools Block

    Delegated

  7. I am satisfied from the advice I have received from the Director for Learning & Culture that the proposals for the Schools Block ensure that the proposals meet the requirement to passport £13.2m and to ensure a 4% minimum guarantee for schools. Some fine tuning to the figures remains regarding final demography figures and adjustments to the formula funding for schools to ensure all schools receive the 4%. This should not require any additional funding. I also note that, within the 4% guarantee, the full effect of the costs of the Teachers Pay Reforms is met. This has been a major part of financial difficulties faced by schools in 2003/04. I believe that the settlement proposed for the delegated schools budget is robust and that, in tandem with the Targeted Transitional Grant of £4.4m available in 2004/05 and a strengthened Schools Finance Team, the problems faced by schools setting deficits can be addressed. I will be looking carefully at the programme for recovery put into place by the Director for Learning & Culture.

  8. I also note that £1.530m has been allowed for statementing. The draft financial plan submitted to me by Learning & Culture shows how the overspending of £0.950m from 2003/04 is eradicated over a three year period: £0.317m per annum contributes to write off the overspending; £0.950m redresses the base and the balance of £0.263m is available to allocate for new statements. There are additions to the budget of £0.4m in 2005/06 and 2006/07. My report to the Executive on 14 January stated that I would look at the financial plan in tandem with the Director’s management action plan so that I could be satisfied that the proposals were robust. This piece of information is outstanding and I recommend that the Director present this to an early meeting of the Executive.

    9. Non Delegated Schools Block

  9. The major item is £1.075m for Out of County provision. Again, the Strategic Finance Manager has submitted a draft financial plan showing repayment of the overspending in 2003/04, £0.972m over 3 years. Therefore, the £1.075m represents a repayment of £0.324m and the remaining £0.751m to redress the base. Given that the overspending is around £0.972m, management action will need to be taken to ensure that expenditure remains in budget. This should form part of the management action plan referred to above.

    10. Learning & Culture – Non Schools Block

  10. The total sum added for other items under Learning & Culture comes to £1.338m. Of this, the largest item is £0.750m for a redundancy provision for schools. Given the problems that schools have faced in 2003/04 and the overspending on the redundancies budget, this should redress the overspend from 2003/04 and meet additional redundancy costs in 2004/05. This will require careful management. It should be ring-fenced and any residue at the end of 2004/05 returned to balances if it is not needed.

  11. The amount proposed for the Youth Service, including restoration of stopped Drugs & Alcohol Standards Fund grant, is £0.190m. The Director for Learning & Culture will need to show how he intends to allocate this amount in the Service Analysis – Budget Book part 2, and budget monitoring reports.

    12. Social & Health Care

  12. The budget proposals for Social & Health Care add £8.5m of expenditure to the budget in 2004/05. This is funded by: grants totaling £5.2m; carry forward estimated at £0.9m; a one off contribution from the pooled budget of £0.5m and expenditure added to the budget of £1.9m. The actual net amount being proposed is £1.908m.

  13. Within this, the total proposed for Older People is £4.4m; £1m for people with Learning Disabilities; £ 0.3m for Physical Disabilities and £1.1m for Children’s Services; £0.2m across client groups and £0.2m for Business Support and£1.4m expenditure to be met from the 2003/04 carry forward and reduction in contribution to the pooled budget. The one off sums of £0.9m and £0.5m are added back into the budget in 2005/06 to fund the ongoing expenditure.

  14. The budget arrangements for Social & Health Care are complex because of the variety of ways in which services are delivered, in particular through partnership. The budget for older people had £3.1m added to it for 2003/04 and is forecasting a carry forward of around £1m. There have been problems highlighted in year around the lack of availability of appropriate home care support and residential care either because it was not available or too highly priced. £3.5m is proposed additionally for market capacity in 2004/05.

  15. Job evaluation funding adds another £1m to the Social & Health Care Budget next year (cumulatively £2.9m). This measure, in conjunction with the increase in market capacity of £3.5m, is intended to address these problems. The intention of the Executive in proposing the budget is to ensure that Social & Health Care are able to improve services to older people and their CPA score. These funding proposals should achieve this. The position needs to be monitored carefully in year and reported back to the Executive.

  16. There will be some uncertainty around the actual level of carry forward achieved in 2003/04 and this will need to be managed .The Executive have been prudent in adding £1.369m to the budget in 2005/06 to fund ongoing expenditure. I recommend that the budget be carefully monitored and reported to Executive during the year.

    17. Environment & Economy

  17. The budget proposals for Environment & Economy come to £1.752m. The largest element is £0.6m for highway maintenance. There is £0.4m for transport development; £0.220m for waste management; £0.1m for Business Support and £0.15m for Highways Management. There is significant carry forward in Environment & Economy this year, some £1.2m. Environment & Economy were asked by the Executive to implement a hold back of £0.550m. This related to slippage on the Structure Plan Examination in Public due in the spring 2004. While most of the increase in carry forward is due to the timing of projects, it would be appropriate to review these budget headings in 2004/05.

    18. Community Safety

  18. I note that there are additions to the budget of £0.295m offset by credits of - £0.591m (these relate to credits on the firefighters pension scheme -£0.306m and -£0.285m on transitional funding for firefighters pay). This means that the net expenditure proposals are a credit of -£0.296m.

    19. Resources & CDC

  19. The amount proposed to be added is £3.375m. The proposals include £1.320m for property related issues, including £0.8m for repairs and maintenance and £0.330m for control of asbestos. I am particularly reassured that £0.4m has been added for the strengthening of Financial Services. I set out my case fully in my risk assessment in my report to 14 January Executive. This, in conjunction with the amounts voted for finance in Learning & Culture (£0.051m), Social & Health Care (£0.050m), and Environment & Economy (£0.087m) (this latter to fund the Business Manager post) shows a commitment to improving the financial control environment.

  20. There is a one off addition of £0.784m to implement a new financial system for schools, with an extra £0.159m the following year. This is a total of £0.943m, which is an initial estimate of what the likely cost of implementation will be. As the project is firmed up, actual costs of implementation will be reported to Executive. However, it must be noted that costs are not expected to exceed the amount allocated and, therefore, the project must be closely monitored and reported on a timely basis. There are estimated on going running costs of £0.346m per annum. Again this sum will be re-evaluated once the project is firmed up and reported back to the Executive.

  21. The Leader of the Council has given his personal support to the various investments in finance systems and staffing and has made it clear he will be looking for successful implementation as the highest priority and he will be looking for significant improvements in financial management and reporting as a consequence.

    22. Reserves and Balances

  22. The amount proposed to be added to general reserves is £4m. This is in addition to £1.1m already allowed for in the MTFP.. The £4m includes £1m which was top sliced from the original inflation assumption of 3% for pay and prices, as set out earlier in my report. My estimate for general reserves at the end of 2004/05 is now £5.3m which is around 1% of net budget. This takes into account the planned overspending on Learning & Culture. I note that the additions to general reserves in future years, £3m in 2005/06 and 2006/07 should mean that they reach around 2% of net budget in 2006/07. This will be dependent on actual inflation rates and other uncertainties. However it is definitely a significant move in the right direction. I have set out the position at Annex 1 (download as .xls file).

    23. Risks and Uncertainties

  23. The major areas of risk are as set out in my badged report A9 of 14 January. These mainly lie in Social & Health Care. There are uncertainties around the level of grant for the Supporting People Programme where the grant allocation may be some £2m less than the existing expenditure levels which are meeting the needs of existing people. Both Nick Welch (who is responsible for the Supporting People programme) and Charles Waddicor (Director for Social & Health Care) are looking at how the gap can be managed. There may also be some changes in the Homes for Older People contract. The Director for Social & Health Care will need to manage these within his proposed budget. There are also potential problems around achieving the income on Fairer Charging which could be around £0.5m and will also need to be managed within budget.

  24. Finally, I alluded to the possibility that £1.9m might be needed to settle one of our contingent liabilities in 2004/05. My recommendation about the minimum level of general reserves required takes account of this.

    25. Other Reserves

  25. The forecast position on other reserves is set out at Annex 2 (download as .xls file). The only other area of significant reserves in the Council is £1.1m for on street parking which is ring fenced and cannot be taken for other purposes and the schools reserves which are estimated to reduce from £7.5m to be nil by the end of year. We have reported particular difficulties this year in agreeing and signing off schools budgets, a growing number of which have set deficit budgets. The overall position indicated that, at worst, there would be an overall deficit of around £2m. The Director for Learning & Culture and I believe that, based on previous experience of schools’ reporting, their apparent intention to end up with £2m negative reserves in year is highly unlikely and a more likely scenario would be nil.

    26. Future years of the MTFP

  26. The future years of the Plan show a decrease in the level of the Council Tax increase from 6.25% for 2004/05 to 6.00%, 5.5%, 5.5%, and 5% in later years. The contingency available to allocate appears very tight in 2005/06 at £8.9m, dependent as it is on efficiency savings of £5m. There is also the possibility, set out in my briefing note to all members (badged document D3 on the 2004/05 Local Government Final Settlement), that we may need to find a further £5m from our assumed RSG next year to meet the school’s passport. However, there are a number of variable factors set out in the report which may change this position. I do note that the full year effect of expenditure proposals for 2004/05 adds £7.4m to directorates in 2005/06. My advice is that directors are informed that they should plan to deliver their budget for 2004/05 and 2005/06 within the parameters set out in the MTFP, that is, allowing for inflation and the full year effects of policy and budget plans in 2004/05. This would be my advice for the life of the plan, given that the contingency in each year is dependent upon a further efficiency target of £5m. This amounts to £22m over the life of the Plan.

    27. Summary

  27. I have set out my considerations fully as is required of me by Section 25 of the Local Government Act 2003. My overall conclusion is that the Budget for 2004/05 appears robust. I have recommended careful monitoring of the budget in key areas. The position on balances is both robust and a significant improvement, both for 2004/05 and for future years. However, the contingency for 2005/06 appears very tight.

    PART 2

    COMMENTARY ON THE PROPOSED BUDGET 2004/05 AND MTFP BY THE LABOUR GROUP- TO COUNCIL 10 FEBRUARY 2004

  28. I have prepared a commentary on the robustness of the estimates and the adequacy of reserves and balances on the Budget 2004/05 and MTFP 2005/06 –2008/09 proposed by the Executive to Council, as required by Section 25 of the Local Government Act 2003.

  29. I have received and noted the Budget 2004/05 and MTFP 2005/06 –2008/09 proposed by the Labour Group. The focus of my commentary is on the variances between the Executive and the Labour proposals.

  30. Overall I note that the difference between the Executive and Labour 2004/05 budget proposals is 2.24%. The increases thereafter are: Executive 6.0%, 5.5%, 5.5%, 5% compared to Labour 4.9%, 4.4%, 4.4% and 4%. Annex 3 (download as .xls file) compares the Budget Proposals of the Executive with the Labour proposals for 2004/05. This is the basis of the commentary set out below. I comment on the robustness of future years later.

  31. The difference in Budget Requirement in 2004/05 is £4.488m less for the Labour budget, of which there is £0.500m less in contribution to general balances and £3.988m less in expenditure proposals.

    32. Inflation/general balances £-0.500m.

  32. The Labour proposals add £3.5m to general balances compared to £4m in the Executive proposals. The treatment of inflation is the same, but of the £1m reduction only £0.5m has been put to general balances. This could be used towards an above 2.5% pay settlement for the Green Book pay award. If the pay award is 3%, then to put back the funding will cost £0.650m, a difference of £0.150m. I am satisfied that their treatment of inflation is robust and this proposal is manageable. However, there is slightly less flexibility than the Executive proposals should an above 2.5% pay award be made..

  33. I note that there is no deduction from inflation in future years where it is still assumed at 3%. This does give some flexibility should actual inflation continue at a lower rate.

    34. Service estimates

    Corporate Items -£0.400m

  34. I note that the proposals fund £2m of the £2.4m shortfall on job evaluation. This is sustainable but the directorates would need to absorb some of the cost and therefore this would have to be made clear in the distribution of the £2m. The shortfall of £0.4m means that the directorates may need to find compensating reductions in services to fund the job evaluation in full

    35. Schools Block £0.167m

  35. I note that there is slightly more in the Labour proposals for the delegated schools budget; SEN Index (£0.150m) and Forces factor (£0.067m). The Executive budget proposals have phased these over two years and three years respectively. There is £0.050m less on the non delegated block, because the proposal for increased support through PRUIS is not supported. The overall difference is £0.167m more proposed for the Schools Block.

    36. Learning & Culture Non –Schools Block -£0.124m

  36. The small variation of -£0.124m includes two major variations in policy. The Executive budget includes £0.750m one off to provide for redundancy costs in schools which the Executive have specified should be ring fenced. This is not included in the Labour budget. The Labour proposals include £0.850m,of which some is recurrent and some one off: to reconfigure the Youth Service including a Modern Apprenticeship Scheme (£0.300m – one off); for a Children’s Director’s Budget (£0.300m - recurrent); Social Inclusion Policies (£0.250m – one off). There are some other small differences. Our advice is that the Labour proposals if adopted would need to be discussed with the Director for Learning & Culture and the redundancy situation be considered further before committing expenditure for growth items. This may require a delay in the implementation of the growth in 2004/05 or to the following year.

    37. Social & Health Care £-0.702m

  37. The Labour proposals add in £7.9m gross expenditure compared to the Executive’s £8.5m.The net difference is 0.702m less in the Labour proposals for Social & Health Care. The major differences are on Market Capacity where the figure for Older People is £1.033m less, Physical disability £0.160m less, and Learning Disability £0.280m less. However £0.300m is proposed to reconfigure services for older people. Labour need to be sure that they have met the higher priorities of the Social & Health Care budget.

    38. Environment & Economy -£1.281m

    Resources and CDC -£1.598m

  38. Both sets of proposals are strengthening services but at different rates. The proposals are £1.281m less overall for Environment & Economy and £1.598m less overall for Resources and CDC. A number of items are not included. The major items excluded for Environment & Economy are £0.600m for Highways Maintenance, £0.300m for abnormal inflation on public transport tender prices, and £0.150m for the development of schemes proposed by the Transport Network review. Lack of investment in Highways Maintenance means that it inevitably takes longer to tackle the backlog; without the extra funding for transport there will be substantial cuts in the level of current bus services provided in some areas and without extra funding to prepare for the next local transport plan, we risk not being able to lever in adequate capital funds beyond 2004-05. For Resources/CDC there is £0.800m less for repairs and maintenance. Again this will mean that it will take longer to make an impact on the backlog.

    39. Community Safety -£0.50m

  39. Both budgets show growth in this area, offset by credits of -£0.591m. The increase in the Labour budget proposals is £0.050m less which is for the radio replacement scheme project manager. Labour would need to ensure that their growth proposals were targeted at the top priorities.

    40. Reserves and Balances -£0.500m

  40. The additional amount for general reserves in 2004/05 is £0.5m less, at £3.5m. This is a tenable position and in line with my advice offered in my report (A9 of 14 January). The additions in future years; £1.5m, £3.3m, £0.3m and £0.8m are also tenable. They represent 1.1%, 1.3%, 1.9%,and 1.8% of net budget and do not meet the 2% requirement set out in the Council’s Financial Strategy which the Executive proposals do in 2006/07. However, I note that inflation remains at 3% after 2004/05 (£1m more per annum) which roughly compensates for this difference.

    41. Future Years of the MTFP

  41. The contingency available in future years is £1.3m more than the Executive Budget in 2005/06. However, thereafter, it is around or below £5.0m and would be dependent almost entirely on achieving efficiency savings. I also note that, although the contingency appears higher in 2005/06, £3.7m of full year effects from 2004/05 is built into the Plan, compared with £7.5m in the Executive Budget. By 2008/09 the difference in the budget requirement has increased from £4.488m in 2004/05 to £16.367m, a variation of 2.5% which is a major difference in financial strategy.

    42. Summary

  42. There are clear differences between the Executive and Labour budget proposals for 2004/05 and in subsequent years. If the latter were to be pursued further, I would advise an adjournment of the Council to allow detailed consideration of the issues outlined above.

CHRIS GRAY
Head of Finance

February 2004

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