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ITEM EX6

EXECUTIVE – 28 OCTOBER 2003

FINANCIAL FORECAST 2004/05 TO 2008/09

Report by Head of Finance

1. This report is number A5 in a series which informs members on the budget process and issues for 2004/05 and the medium term. This report should be filed in numerical sequence on your Budget & Oxfordshire Plan 2004/05 green binder. The sequence of reports allows all members to trace from the start of the budget planning process, all of the information available on the budget as it emerges. The previously issued reports are:

• A1: Maximising Our Resources – the Executive’s Budget Strategy for 2004/05
• A2: Financial Forecast 2004/05 – 2008/09 (Overview 1) – a reminder of what is included in the published MTFP which is the starting point for the budget
• A3: Provisional Outturn 2002/03 - a report on how the budget performed in financial terms last year
• A4: Financial Forecast 2004/05 – 2008/09 – an update in July 2003 which made an early estimate about the potential for adding further expenditure proposals to the budget in 2004/05 and asked the Directors to work up their proposals to present to the October meeting.

2. This report revisits some of the previously published data and provides an update on what has been happening since July, along with the latest information on the Council’s financial position. It updates the information on the likely central government funding for 2004/05 and the medium term, as far as we can ascertain, and explains the requirements for schools’ funding. It is the uncertainties around funding, in particular for schools, that make it impossible to present a balanced budget at this stage. There remain too many unknowns, outside of the Council’s control. The commitment remains to balance the budget with a Council Tax increase of no more than 9.1%.
3. The report also sets out the latest position on the expenditure proposals from the Directorates presented by Programme Area. Significant work has been undertaken by CCMT to put these proposals into a priority order. However, any decisions can only be made as the funding situation becomes clearer.
4. I have set out the issues in the report by starting with the published MTFP and then updating the details. The following annexes are attached:

Annex 1: Specific Grants (download as .xls file)

Annex 2: Expenditure Proposals – Schools Block (download as .xls file)

Annex 3: Expenditure Proposals – Other Programme Areas (download as .xls file)

Annex 4: Schools Indicative Budget and Formula Spending Share 2004/05 (download as .xls file)

Annex 5: Revised Budget Planning Timetable (download as .doc file)

Published Medium Term Financial Plan 2004/05 Net Expenditure and Funding

5. The following table sets out the starting point for the budget as set out in the approved MTFP:

*Gross budget 2003/04 Less: *Specific grants 2003/04 *Income 2003/04 Equals: Budget requirement 2003/04 Add new 2004/05 items: Inflation & other variations Ongoing 2003/04 Policy & Budget Plans Known Service Transfers Efficiency savings 2004/05 Variation in Contingency 2004/05 Equals: Budget Requirement 2004/05 Funded by: Total Formula Grant (Revenue Support Grant plus Business Rates) Council Tax (including surpluses) Total Funding

£m 668.8   -91.0 -69.7 508.1     18.6 3.5 0.1 -3.0 10.8 538.1   320.6 217.5 538.1

 

* Reference page 8 Medium Term Financial Plan 2003/04 to 2007/08 Service Analysis

Budget Requirement and Council Tax Increase

6. The published MTFP implies an increase in Budget of 5.9% and an increase in Council Tax of 9.1% in 2004/05. Total Formula Grant has been assumed to increase by 3.4%, or £10.6m, to £320.6m (the grant increase is lower than the 4.9% announced in the 2002 Spending Review because of the falling out of £4.6m Education damping grant). The increase in the budget is £29.9m. After taking account of the increase in grant funding, the rest of the increase, £19.3m, has to be met from the Council Tax, giving rise to a 9.1% Council Tax increase. This compares with some conflicting national figures: a 4.4% increase in the Assumed National Council Tax provided by the Somerset RSG Team based on revised 2002 Spending Review figures and a 7.3% increase in local authority self financed expenditure (this is mostly Council Tax) given in the Public Expenditure: Statistical Analysis May 2003 produced by HM Treasury. We are not sure what accounts for the difference and may not have clarification until we get the provisional settlement in November. The loss of Education damping grant in Oxfordshire would make the Council Tax increase 2.3% higher.

Specific Grants

7. The 2003/04 budget includes specific grants totalling £91m. It is important that we know what the level of grants will be in 2004/05. Loss of grant impinges directly on service provision. We are currently anticipating that the majority of these will continue in 2004/05 but this needs to be kept under close review. Where grants are discontinued there are three possible scenarios:

• Government decides that resources are transferred to Formula Spending Share. If this increase in FSS is additional to that assumed in the MTFP then we will receive additional resources which will compensate – in total or in part – for the loss of specific grant;
• Government transfers the resources to FSS but these resources are included in the FSS assumptions that we have already made. In this case, it will be necessary to increase spending (an additional budget pressure) or stop the spending currently funded by the specific grant;
• The grant ceases with no transfer to FSS. Spending will need to stop or be funded by an alternative source (possibly a new grant regime).

8. The Government has decided to reverse the reductions previously announced for Standards Fund support for schools. This promise does not extend to the non – schools Standards Funds Grants but the impact of the latter has been included in the expenditure proposals.
9. The main changes for Social & Health Care are:

• Children’s Grant (£4.3m) and Deferred Payment Grant (£0.5m) will transfer into FSS.
• Performance Fund Grant (£1.0m) will stop. This grant has been used to fund short term projects which will cease.
• Preserved Rights Grant (£5.2m) will reduce by £0.5m in 2004/05 and gradually transfer into FSS.

10. Current assumptions are that Social Services FSS will increase beyond the level assumed in the MTFP to compensate for the loss of the first two specific grants. However, the reduction in Preserved Rights Grant will have to be met from the resources already assumed in the MTFP. Providing that the assumptions about attrition are correct then this will not present a problem. However, I still have concerns about the overall funding situation which may not be clarified until some time after the settlement in November.
11. Annex 1 lists the grants which make up the £91m included in the 2003/04 budget, shows the ongoing position in 2004/05, and adds new grants that have been notified to us in 2003/04. It is important to note that information on specific grants has historically tended to emerge after the settlement date. This makes it difficult to predict the precise impact at the time of the settlement.

Income

12. The £69.7m income included in the 2003/04 budget includes £42.0m of Customer and Client Receipts and £2.5m of On-Street Parking income. The charges will be considered as part of the Review of Charges report to the Executive in December 2003. The largest element of the remainder is Other Grants, of which £13.6m is funding from the Health Authority received by Social & Health Care. It is expected that the latter will continue in 2004/05.

Inflation

13. The MTFP allows for inflation at 3.0% overall on all budgets and amounts to £15m. The "Green Book" staff pay claim will not be submitted until January 2004.  It is normally submitted in November but will be delayed until January pending the outcome of the teachers’ settlement.  Indications are that the Government expects the latter to be a 3 year settlement at around 2.5% for the first year. Each 0.5% represents £0.8m on teacher’s pay and £0.6m on Green Book pay. We will need to review the overall provision for inflation as the budget is refined over the coming weeks.
14. September RPI was 2.8% and fell from 2.9% in August. The underlying rate, RPIx also fell from 2.9% to 2.8%. The Government target is still on course for 2.5%. After a large rise in the construction related Baxter Index in 2003/04 resulting from the introduction of the Virgin Aggregate Tax, the 2004/05 rate is likely to be around 4.0%. This has been allowed for in the budget.

Ongoing 2003/04 Policy and Budget Plans

15. The forecast allows for the ongoing effect of the policy and budget plans agreed in 2003/04. The largest elements relate to Job Evaluation and ICT. Further detailed work is required to assess whether the amount included for Job Evaluation is adequate. Early estimates indicate that there is a shortfall of around £0.980m in 2003/04. Of this £0.651m has been absorbed by Social & Health Care and the remainder is a call on the general reserves. Social & Health Care are currently looking at future years’ implications for job evaluation.

Efficiency Savings and Base Budget Reviews

16. The MTFP assumes the continuation of the £2m efficiency savings made in 2003/04. In addition it assumes a further £3m for 2004/05 and £5m in each subsequent year. 2004/05 efficiency savings identified to date are as follows:

Directorate	£’000
Learning & Culture	255
Social & Health Care	331
Environment & Economy	490
Community Safety	215
Resources	397
Unachievable Savings in MTFP (Energy Contract)	-107
Total	1,581



17. Further work is being carried out which may increase the total savings that can be achieved next year, but forward planning will be required to achieve a further £5m in 2005/06.
18. The figures in the table show cash releasing efficiencies from both an efficiency exercise across all directorates, and from the rolling programme of Base Budget Reviews which commenced in June 2003. However, the sum total of efficiency gains cross Council should be greater, as a result of directorates absorbing some areas of essential spending where extra funds have not been allowed for in the budget.

Contingency 2004/05

19. The MTFP includes an unallocated contingency of £11m. This is dependent upon new efficiency savings of £3m in 2004/05. The amount of efficiencies secured so far for 2004/05 is £1.6m as shown above. Any shortfall in delivering the efficiencies target reduces the amount of contingency available to allocate in direct proportion to the shortfall. This unallocated sum is available to meet additional expenditure proposals.

2004/05 Expenditure Proposals

20. Directorates have been working over the summer to consider what additional spending is either essential or desirable if the performance of the County Council is going to improve. Given that this exercise started relatively early in the year, then by necessity new proposals have been added to the initial list and refinement of the existing list is ongoing.

Schools Budget

21. The latest expenditure proposals for Schools Budget are set out at Annex 2. Possible extra spending of £6.5m has been identified which would increase the Individual Schools Budget (delegated). In addition, possible extra spending of around £1.0m has been identified which would increase the non-delegated schools block. Funding for Schools is both uncertain and complex. Some of the detailed issues and complexities are set out below. It will be important to know how much funding will be available for Schools before being able to make any decisions about either the increase in the schools budget or the rest of the County Council’s budget.
22. Annex 4 sets out what the best and worst scenarios might be and is explained more fully below. In summary, the worst case scenario shows no additional funding for Schools above the assumptions in the MTFP, and the best case scenario shows an additional £3.4m funding available. This would partially meet the schools’ expenditure proposals of £7.5m, leaving £4.1m to be considered alongside the other Programme Area proposals. Annex 4 also sets out the relationship between the delegated and non-delegated parts of the schools block. This is extremely important, since the increase in the non-delegated column must not exceed the delegated column.
23. The total proposals for all other Programme Areas come to £15m, with an additional £1m for strategic measures which is an addition to general reserves. The full list is set out at Annex 3. The Directorates have done a lot of work together to put their proposals into their highest priorities, medium priorities and least important priorities. These are identified as categories (a), (b) and (c) and have been based upon unavoidable expenditure pressures and the Priority Framework approved by Council in June 2003.
24. If we consider the expenditure proposals set out in Annexes 2 and 3 set against our assumptions around funding and the amount of contingency available, then the table below shows some of the possible outcomes.

Published MTFP & Current Expenditure Proposals				Contingency Assuming Current Efficiency Savings
				Best Case	Mid - Way Case	Worst Case
		£m		£m	£m	£m
Contingency		11.0		10.0	10.0	10.0
2004/05 Expenditure Proposals:				Possible use of Contingency:
Schools:	ISB	6.5
	Category A	1.0
	Subtotal	7.5		4.1	5.8	7.5
	Category B/C	0.3
	Total Schools	7.8
Strategic Variations		1.0		1.0	1.0	1.0
				Leaves a balance of:
Other:	Category A	5.9
	Category B	6.1
	Category C	3.0
	Total Other	15.0		4.9	3.2	1.5
TOTAL		23.8		10.0	10.0	10.0
Assuming Efficiency Savings of:		3.0		2.0	2.0	2.0

 

Schools Issues

2003/04 School Deficits

25. Balances held by Oxfordshire schools reduced by £3.5m to £7.5m at 31 March 2003. The budgets returned by schools for 2003/04 indicate that they could be in deficit by up to £2.8m overall by 31 March 2004. Work is still ongoing to approve the submitted budgets. However, we need to acknowledge the impact of a potential deficit overall on schools balances this year both in relation to the Council’s overall financial position and in allocating the budget priorities for 2004/05 and onwards. We also need to consider what the continued effect will be on schools’ balances. The current scenario represents a net downward movement in balances of £10.3m.
26. Whatever the additional funding is for schools in 2004/05 and 2005/06, we will need to agree with schools their individual recovery plans for getting back into balance. Key to this will be the need to ensure recurrent spending is affordable within their revenue delegated budget for 2004/05 and 2005/06. If schools need to plan to reduce their expenditure, then they will require, as early as possible, notification about their likely funding levels for next year and the year after. However, we are unable to determine how much this will be until after the settlement has been announced in week commencing 17 November. The delay in the announcement of the details of the real terms per pupil increase has not helped in clarifying the schools’ funding position.

2004/05 School Budgets & DfES Requirements

27. Following the problems experienced by schools when setting their 2003/04 budgets the Education Secretary made a statement on 17 July setting out a range of new requirements for 2004/05 and 2005/06. The main changes are as follows.

Guaranteed per Pupil Increases

28. Every school will receive at least a guaranteed per pupil increase in its funding for each year. This will be based upon the average cost pressures for 2004/05 and 2005/06. A survey by the County Councils Network identified budgetary pressures of 4.7% in County Council schools in 2003/04. This is likely to be the maximum that we could expect the guarantee to be set at, but might provide Oxfordshire with up to an additional £2.4m Education Formula Spending Share (EFSS) compared with the assumptions in the MTFP.

Schools FSS

29. Floors and ceilings in the overall increase for the Schools FSS in each authority will be set to take account of the per pupil guarantee. The Government will ensure that each authority receives sufficient RSG to "passport" in full the increase in Schools Block FSS to its schools budget.

Individual Schools Budget/Central Expenditure Increases

30. For 2004/05 and 2005/06, spending on central items should rise no faster than spending on the Individual Schools Budget (ISB). Annex 4 sets out the impact on the relevant OCC budgets and shows the gearing effect of the different size of the base budgets. The effect of this is that proportionally more needs adding into the ISB to generate the same percentage increase as in the smaller non-delegated budget. Based upon the current proposals of £7.5m (£6.5m ISB and £1m non delegated) Annex 4 shows that the % increase in the ISB column would need to be around 0.2% or £0.4m higher to match the increase in the non – delegated items.
31. In the worst case scenario both the budget and EFSS increase by £8.8m, so we would achieve the passport before adding any new policy plans. All of the £7.5m expenditure proposals shown would have to come from the £11m unallocated contingency included in the MTFP.
32. In the "best" case the budgeted expenditure position remains unchanged, but we would receive up to £3.4m additional EFSS (and Revenue Support Grant) on top of the basic "worst case" increase giving us a total passport of £12.2m. This is the £8.8m worst case passport plus an additional £3.4m for the per pupil guarantee (£2.4m) and demography (£1.0m). A smaller guaranteed increase per pupil would produce a lower amount of additional EFSS and the amount to be met from the contingency would be an equal amount higher. The actual settlement is likely to be somewhere between the "best" and "worst" case.

Funding Arrangements

33. The Spending Review 2002 set out the Government’s spending plans for the years 2003/04 to 2005/06. Formula Spending Shares will continue broadly unchanged in 2004/05. However, there will be some changes as follows:

Function Changes

34. From 2004/05 local authorities will no longer have to pay a flood defence levy; this is transferring to Central Government. Our FSS will be reduced to reflect this.

Census data

35. For 2003/04, early information from the 2001 Census was used to calculate the population estimates that were used in our FSS calculation. Since then, more information has been released from the 2001 Census. Including this new information in our grant calculation in a straightforward fashion would add about £2.3m of FSS and £2.3m of grant (ignoring the effects of grant floors and ceilings). However the Government has decided not to include the new Census information, on the grounds that its 'late availability' has 'limited the options for using it'. Because of this it is not expected that the new Census information will be included in the 2004/05 grant calculations.

Capping

36. Because of the large increases in Council Tax in 2003/04, the Government have indicated that they might cap Council Tax increases in 2004/05 if they consider that they are "excessive". Further information is required to be able to assess what will be considered "excessive".

Current Financial Situation

37. The monthly monitoring report elsewhere on the agenda reports the latest projected position up to the end of August. There are a number of important issues emerging, which need to be addressed in considering next year’s budget. There are pressures in Learning & Culture on Children’s Services. These are ongoing pressures which have been allowed for in the schools expenditure proposals for 2004/05. However, the pressure for this year of £1.634m (which may still worsen for Out of County) will need to be carried forward to 2004/05 and be met from within the Learning & Culture budget next year. The schools’ balances forecast for 2003/04 is potentially a deficit of £2.8m. This counts against general reserves.

Strategic Variations

38. This area relates to debt financing on the capital programme and interest on balances. Work in this area has yet to be completed and may result in further variations to the budget situation this financial year and the forecast budget for 2004/05.

Reserves and Balances

39. For budget processes beginning after 1 April 2003, authorities are required to comply with new guidance issued on reserves and balances. This requires us to assess the adequacy of unallocated general reserves against the strategic, operational and financial risks facing the authority when setting the budget. I am recommending that at the minimum £1m must be added to balances in 2004/05 although, if the budget situation were more favourable, I would be inclined to revise this upwards. The Financial Strategy aspires to balances at a level of 2% of the net budget or £10m by 2007/08. The MTFP allows for balances to grow by £1m each year up to 2007/08, when they should reach around £8.8m, if there was no erosion in balances during this time.

2005/06

40. The MTFP assumes a 6.9% increase in Total Formula Grant (TFG) for 2005/06 in line with the national increase announced in the 2002 Spending Review.
41. Based on information from the Somerset RSG Team, the latest estimate of the national increase in TFG is 6.8%. However, part of this increase relates to a large increase in the Capital Financing FSS (17.2%) and it is unclear how much of this relates to mainstream capital financing and how much to PFI grants. If the mainstream capital financing increase is say 5.8% in line with the services FSS control totals, then this would bring the TFG increase down to about 5.8%, equivalent to a drop of £3.5million on the previous forecast. As well as uncertainty as to whether it is appropriate to assume the full national increase, there is also insufficient detail to determine whether the increase is all growth or takes into account function/funding mechanism changes. Based on our assumption about the Preserved Rights Grant, a further £3.2m would have to be absorbed within the TFG increase for the reduction in grant.
42. A reduction in grant of £6.7m (£3.5m + £3.2m) would reduce the contingency available in 2005/06 to approximately £29m if Council Tax increases are to be kept at the levels set out in the MTFP. This gives £18m "new money" for 2005/06. However, this will have to meet the full year effects of expenditure proposals agreed for 2004/05 and is dependent on achieving a further £5m efficiency savings. Demography is not treated as an automatic add-in to the budget and so would have to be met from this money. It would also be appropriate to consider whether we should close the gap between the Financial Strategy target for balances and the actual level of balances at this point.
43. The MTFP includes increasing provision for the costs of the Pension Fund Revaluation from 2005/06 (£1.5m) to 2007/08 (£3.3m). The next pension revaluation is due for completion at the end of March 2004 and will be reported in the autumn 2004. It is possible that the amount required in the MTFP will increase. The future estimates for Job Evaluation will also need to be refined.

Beyond 2005/06

44. The Government has not announced any spending plans beyond 2005/06. The MTFP assumes increases of 3% for 2006/07 & 2007/08 in line with inflation assumptions. The next Spending Review is due in July 2004, which will re-state the figures for 2005/06 and give control totals for the following 2 years. There has been press speculation that non-health spending beyond 2005/06 will rise in line with the 2.5% a year underlying growth of the economy. Based on the Government’s inflation forecast of 2.5% a year, the total annual increases would be 5% a year. This is more than we have assumed in the MTFP but smaller than the increases that we have received in recent years.
45. The latest forecast on the Homes for Older People project indicates that the surplus capital resources being used to fund the additional revenue costs in the early years of the contract will be used up by 2006/07. This gives rise to additional costs of £0.5m falling on the revenue budget in that year, rising to £3.1m in 2007/08. This is a year earlier than allowed for in the current MTFP.
46. We will need to ascertain the replacement costs for the Oxfordshire Community Network and the sufficiency of ICT replacement funds generally. This will need to be built into forward plans.
47. Oxfordshire’s local Public Service Agreement agreed targets and funding are shown on page 58 of the MTFP Summary 2003/04 to 2007/08. We have not factored any of the Performance Reward Grant into the forward plan. This is dependent on our reaching our targets. If we do succeed, then the total reward grant is £12.8m, of which half is payable mainly to schools and some to other partners and half will be payable to the Council. It is important we focus on the achievement of the targets.

Capital Programme & Prudential Guidelines

48. The capital programme will need to be considered alongside the revenue budget when the Council sets its budget in February 2004.
49. A major change in the system of capital financing in local government – the Prudential Guidelines - will be introduced from 1 April 2004. Currently the Government controls how much new borrowing each authority can take out each year. In future the system will be based on self regulation, with each authority determining its own capital spending and funding within a framework of affordability, prudence and sustainability.
50. The Code places more emphasis on the Capital Strategy and Asset Management Plans. The authority’s capital strategy sets the framework for capital investment and provides the link between the Council’s key priorities and objectives and its investment plans.
51. The published MTFP assumes that an additional £2m will be borrowed for each of the years 2004/05, 2005/06 and 2006/07. The exact amount of any future additional borrowing to fund capital will need to be considered as part of the 2004/05 setting process.
52. In order to be able to deliver the City Schools Reorganisation DfES granted us additional ACG of £9.9m and an additional grant of £2.9m. However, they required that 50% of any excess capital receipts from sales of City schools be returned to them. We are now in the process of negotiating with DfES on how this agreement should be resolved. A meeting between DfES officials and the Director for Learning & Culture is due shortly, and then I will be in a position to report back more fully.

Process & Timetable

53. The Provisional Local Government Settlement issued by the ODPM is expected in the week beginning 17 November. In addition the DfES have issued a timetable with key dates for the Education budget, although there is already a delay in the announcement of the details of the real terms per pupil increase. The deadline to apply to increase central spending in excess of the percentage increase on the ISB is 5 December 2003. The deadline for notifying the DfES of our passporting intentions is 31 December 2003. The Executive have agreed there should be a seminar in early December to inform all members on the outcome of the Local Government Settlement. Arrangements for this are currently being made. The Executive will firm up their budget proposals and propose the Revenue and Capital Budget for 2004/05 – 2008/09 initially on 14 January 2004, to allow consideration by Corporate Governance Scrutiny on 20 January, and finalise their proposals to Council at their meeting on 27 January. An updated timetable is at Annex 5.
54. Consultation with Stakeholders will take place in November and the Community Budget workshop will take place in January 2004.

The Executive is RECOMMENDED to:

1. confirm that the draft budget should be prepared on the basis:

0. of the current Medium Term Financial Plan;
1. that inflation will be allowed at 3%; and
2. that, as a minimum, the Schools block Formula Spending Share increase will be passported to the Individual Schools Budget;

2. authorise the Head of Finance, in consultation with the Leader of the Council, the Deputy Leader, the Executive Member for Schools and the Director for Learning & Culture, to apply for exemption to the Secretary of State by 5 December 2003, if the non-schools budget is required to increase by a greater percentage than the Individual Schools Budget;
3. invite the respective Scrutiny Committees to advise on the expenditure proposals for the Schools Budget as set out at Annex 2 to the report and for other programme areas at Annex 3, and on the relative priorities of the proposals;
4. endorse the revised timetable at Annex 5 and authorise arrangements for an early December members’ seminar on the Local Government Settlement.

CHRIS GRAY
Head of Finance

Background Papers: Nil

Contact Officers:
Jenny Hydari Tel: (01865) 815401
Kathy Wilcox Tel: (01865) 816087

October 2003

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