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ITEM EX5D

EXECUTIVE - 14 JANUARY 2004

REVENUE BUDGET UPDATE 2004/05– 2008/09

Report by the Head of Finance

1. This is an interim report between the preliminary position reported to the Executive on 28 October and the final budget report to be presented to the Executive on 27 January. This report sets out: the effects of the Local Government Settlement; the forecast financial position this year; the updated expenditure proposals by Directorates; my current advice for reserves and balances; and prospects for future years’ budgets and council tax increases. The position on capital will be set out in the 27 January report. The final report will set out the detailed base budget and expenditure and savings proposals (including the inflation rate awarded and full year effects of policy and budget plans from 2003/04) for all Directorates. There will be council tax base information from District Councils where available.
2. I have reviewed the performance of the budget this year, as presented monthly via the budget monitoring report to the Executive. I have looked at the expenditure proposals and highlighted any outstanding questions where appropriate. I have updated my risk analysis, based upon the performance of the budget this year, budget proposals for 2004/05 and known and anticipated risks next year and beyond. On the basis of the evidence, I have reviewed the level of balances and updated my recommendations. I have also looked at the longer term consequences for the budget.
3. Members should note that this is a badged report, No. A9 in the series of budget reports to the Executive, and should be filed under the relevant section of the green binder for the Budget and Oxfordshire Plan 2004/05.

The Local Government Provisional Settlement

4. The Local Government Provisional Finance Settlement was announced on 19 November. The effect of the settlement was to give Oxfordshire an additional £8.7m above our published forecast of £320.6m, which, when applied to the assumptions in the published MTFP, gives a Council Tax increase of 4.7% assuming no change to the assumptions set out in the Plan and allowing only for the increase in grant; or 7.3%, assuming the additional amount received for Education and function changes (£4.3m plus £0.8m) is added to the budget requirement. This compares with the published forecast increase of 9.1%.
5. Subsequently on 10 December, the Chancellor announced an extra tranche of Revenue Support Grant (£340m nationally) which it was indicated should help Councils deliver a Council Tax increase in low single figures. The Minister for Local Government announced:

‘Given the scale of the investment in local services and the scope for efficiency improvements in local government, the Government believes next year local authorities must aim to deliver council tax increase in low single figures. Unreasonably large council tax increase will neither be justified or acceptable.’

6. Oxfordshire received a further increase in RSG of £4.4m – reducing the published equivalent budget to 2.5% and 5.1% respectively, compared to the 4.7% and 7.3% set out above.
7. The MTFP assumes the contingency available to allocate is £10.9m, dependent on £3m of efficiency savings to be achieved cross Council. The contingency reduces by the same amount as any reduction in the efficiency total. By adding the £4.3m extra for Education and £0.8m for function changes to the budget requirement for the Council, the contingency remains available to allocate against additional expenditure proposals. This gives a Council Tax increase of 5.1%.
8. The detail and effect of the initial and subsequent announcements are set out in papers D1 and D2 which were circulated to members to place on the green Budget and Oxfordshire Plan 2004/05 file.

Expenditure Proposals

9. Since the preliminary list of expenditure proposals presented to the Executive on 28 October, there has been further work and refinement. The full revised list has been issued separately as document A7. The resubmitted list of expenditure proposals sums to £6.299m for Schools Block proposals and to £19.490m for all other proposals. This compares with £7.766m for Schools Block and £15.969m for other proposals presented on 28 October, and for consideration by Scrutiny at their meetings in November and December. The major changes are highlighted below.

Corporate Commitments

10. There are ‘Further items’ in the revised expenditure proposals, classified as corporate commitments, of £2.280m. This is mainly accounted for by: an estimated further £2m for the costs of implementing job evaluation in 2004/05; and £0.300m adjustment for Revenue Support Grant for a population estimate in 2003/04 which was over funded. The total cost of implementing job evaluation is now assessed at £7.8m over three years, rather than the £5.1m agreed in 2003/04. I have been updating members on this, via the monthly monitoring report to the Executive. This year £0.3m has been met from balances, £0.6m has been absorbed by Social & Health Care and Learning & Culture are reporting a shortfall of around £0.4m – this is still being worked on. Some costs have arisen on account of regradings and restructuring and should not be attributable to job evaluation – this accounts for around £0.2m. This has been taken into account in the estimated cost next year.
11. If it is decided that the cost of job evaluation is not funded in full, Directorates will need to find compensating savings to fund the shortfall. These would need to be identified prior to the budget being agreed, since they would impact on the robustness of the final proposed budget.

Learning & Culture

12. The settlement for Education means that the Council is required to passport £13.2m to the Schools Block (this includes delegated and non delegated expenditure directly related to pupil funding). The MTFP assumes inflation for pay and prices at 3%, plus allowances for the full year effects of policy and budget plans agreed for the 2003/04 budget. This adds £8.9m to the Education budget, of which £6.9m is attributable to Schools Block. The minimum amount that needs to be added to the schools delegated budget is the amount required to achieve a minimum increase of 4% per pupil. This will be more than £6.9m but less than £13.2m. The Schools Finance Team are working to establish the figure required to meet the 4% guarantee. An updated position on the expenditure proposals for schools is attached at Annex A (download as .xls file).
13. Demography figures have been updated on latest pupil counts, although the statutory pupil count in January is the actual figure used to set the schools’ budget. The latest estimates should be very near to this. The updated figures show a decrease in pupil numbers, giving a negative demography figure of £0.800m and, in addition, there is a further negative figure of £0.800m due to claw back where the January count used to forecast the following September’s intake is higher than the actual. Schools will need to manage the drop in pupil numbers and, in some cases, this may be significant. Given that demography was allowed for in the 28 October list of expenditure proposals at £1m, the updated position of -£1.6m allows more flexibility within the passport of £13.2m, to meet other pressures and proposals.
14. The two major figures proposed to go into the schools delegated budget (which count towards the 4% minimum guarantee) are £2.5m to cover the unfunded cost of the Teachers Pay Reforms since they were introduced and £0.600m for KS3 funding. The gap between the actual costs of the Teachers Pay Reforms and the funding will have contributed to some schools being in deficit; others will have taken action to manage this within budget. We have already allowed for £6.9m (assuming pay and price inflation at 3%) to be added to the schools delegated budget as stated above. If we add the £2.5m and £0.6m (£3.1m), offset by the demography reduction of -£1.6m, this gives a total schools delegated budget of around £8.4m. The caveat is that, until we have established exactly the sum required (to be distributed via the existing schools’ funding formula as agreed at the Schools Forum), it is not possible to be definitive that the £8.4m will achieve the 4% guarantee. However, given that the current year’s delegated budget is £202.2m adding £8.4m appears to add (in very broad terms) just above 4% and it would fully fund the Teachers’ Pay Reforms. However, the strategic finance manager for Learning & Culture has reported difficulties encountered in ensuring all schools receive the minimum guarantee through the schools’ funding formula. He is discussing options with DfES about how this might be achieved.
15. There is a DfES requirement that, within the Schools Block, the non-delegated central items should not rise in percentage terms higher than the delegated block. The deadline for submission for exemption is 13 February. The current figures set out at Annex A indicate that we are unlikely to be able to meet this requirement. This may change if the introduction of the single point of entry for 4 year olds leads to a sufficient shift in pupils from the private and voluntary sector to LEA maintained schools.
16. Other category A items have been updated. These include latest estimates for statementing of £1.530m and out of county independent school placements of £1.075m. These expenditure items do not form part of the 4% guarantee to schools but they do count towards the passport.
17. The teachers pay award for 2004/05 is 2.5%. We have allowed 3% for all pay and price inflation. I have made some comments for discussion on inflation later in the report. If it can be shown that actual inflation is less than 3%, there is potentially more headroom to meet other expenditure proposals for schools. Therefore, we need to establish the costs of the teachers pay award for Oxfordshire schools and do some further analysis on non pay expenditure. This is being looked into.

Social & Health Care

18. Social & Health Care has recovered this year from a period of overspending. It has been apparent from the budget monitoring reports that a number of areas within Social & Health Care will have carry forwards at the end of the year. The current forecast carry forward is around £1m, after making an additional payment into the pooled budget of £0.500m. A large part of the reason for the carry forward position in Social & Health Care has been the inability to purchase services in the market place for certain client groups. Therefore, there are people awaiting care packages or residential places. The expenditure proposals put forward by Social & Health Care are designed to reduce the waiting for services and, in particular, improve services to elderly people. Our CPA has identified this as an area for improvement and investment in services is required. The revised spending proposals from Social & Health Care are significantly different to those put forward to the October meeting. The changes reflect work done on the Commissioning Strategy for Adult Services and increased specific grant allocations.
19. We should understand fully how the carry forward this year impacts on next year’s budget. The £0.500m additional payment to the pooled budget this year reduces the contribution required next year. There has been an increase in grants, some un-ringfenced, which also help towards the pressures. These include £3m additional for Access and Capacity and an increase from £0.5m to £1m for Delayed Discharges. Not all of these increases continue into the next year and this is factored into the budget. It is also important to note the performance of the pooled budget when setting next year’s budget. This is currently forecast to under spend by around £0.5m. The total pooled budget is £52m.

Corporate Governance

20. There is a priority need to replace the current financial system in schools which is no longer supported by Capita. In view of the current problems experienced around school budgets and the Government’s concern about the quality of financial planning and monitoring in schools generally, the Director for Learning & Culture has indicated that this area is his highest priority. The original proposition, being tested with a number of pilot schools, was to roll out the SAP Management Information System which has been implemented as the Council’s prime financial and human resources system. There is still a debate around whether this will best meet the needs of all schools and further work is on going with ITNET, the consultants for SAP to see what developments are possible to make the product more accessible to schools. The actual costs could be around £1m: the current estimate is £0.943m but this is being refined. Initially, there was a hope that it might be possible to identify a one-off source of funds to meet these costs. This is now looking much less likely. Therefore it is prudent to assume at this stage that this will be a one-off cost which will have to be met from the contingency next year. There will also be ongoing revenue costs of supporting the new system estimated at around £0.3 - £0.4m per annum.
21. The Chief Executive and the Director for Resources have suggested that the figures of £0.250m for Business Process Re-engineering and £0.090m for the Human Resources review be met from the modernisation fund. These are therefore not additional expenditure proposals.

Efficiencies

22. The target for 2004/05 in the MTFP is £3m and this increases by £5m year on year up to 2007/08 and beyond. The gross amount identified for efficiency savings in 2004/05 is £2.159m. This reduces slightly to £2.052m due to unachievable savings from 2003/04 of £0.107m. An analysis and explanation is included at Annex B (download as .xls file). The achievement of £2m of efficiencies against the target of £3m means that the contingency reduces from £10. 9m to £9.9m.
23. I am suggesting that the process for achieving efficiency savings should be reviewed as soon as possible. The Executive may wish to allocate targets to Directorates and for areas cross Council. I think this is important, because a failure to achieve the efficiency target impacts on the contingency available in future years.

Inflation Assumptions

24. An area that may offer some flexibility in the budget is the assumption in the MTFP to allocate 3% inflation across the board.
25. In his Pre-Budget Report statement on 10 December 2003, the Chancellor of the Exchequer confirmed that the U.K. inflation target is now based on the Harmonised Index of Consumer Prices Index (HCPI), which the National Statistician has renamed the Consumer Prices Index (CPI) in the U.K. The level of the new CPI inflation target has been set at 2 per cent and applies from 10 December 2003.
26. Until the introduction of the CPI we have used the RPIX as our measure of inflation. The RPI and RPIX (RPI excluding mortgage interest payments) will continue to be published alongside the CPI. In terms of commodity coverage, CPI excludes a number of items that are included in RPIX, mainly relating to housing. These include council tax and a range of owner–occupier housing costs such as mortgage interest payments, house depreciation, buildings insurance, estate agents’ and conveyancing fees.
27. There is a big difference between the CPI and RPIX inflation rates. The RPIX annual rate currently exceeds CPI by well over 1 per cent. CPI was 1.3% in November, RPIX around 2.5%. This is mainly due to the CPI’s exclusion of most housing costs that are included in RPIX, such as council tax and house depreciation which have been rising relatively rapidly this year.
28. In terms of their basic usability, there is little to choose between CPI and RPI/RPIX. They are both published each month to a common timescale and are subject to minimal revisions. I am inclined to think that the CPI may be a better measure of inflation for non-pay prices than RPIX. However, I wish to remain cautious and prudent. I therefore consider that non-pay inflation could be reduced from 3 per cent to 2 per cent. If we exclude all special cases put forward for above average inflation (mostly services in Social & Health Care) and contracts (mostly in Environment & Economy) then the potential saving is £0.350m cross Council. However, I strongly advocate that Directors be asked to review their estimates for above average inflation. This is because a number of contracts are still based on RPIX as an indicator rather than CPI. It would be timely to review the appropriateness of the measure used.
29. With regard to pay, the teachers have received a pay award of 2.5%. We have allowed 3% in the budget. The pay deal for other local government officers is not yet agreed but if it follows the teachers pay award will be 2.5%. If we assume pay inflation (excluding schools) at 2.5%, this saves around £0.650m cross Council. My initial preference would be to hold this amount in general reserves, since the pay settlement will not be known when setting the budget.
30. I would like to discuss these proposals further with the Executive and CCMT.

Budget Performance & Forecast Outturn 2003/04

31. Learning & Culture are reporting forecast overspending of £2.6m in 2003/04. The overspending is due mainly to increased spending on statementing of £0.950m, placements in out of county independent schools of £0.971m and premature retirement of £0.450m. The Executive has asked the Director for Learning & Culture to prepare a report to show how these expenditure pressures are being contained and reduced in year. The Strategic Finance Manager for Learning & Culture has submitted a 3 year repayment plan to repay the overspending on statementing and out of county placements which I am reviewing. I will look at this in tandem with the Director’s management action plan so that I can be satisfied that the planned budget for next year will be robust.

General Reserves

32. Balances started the year at £4.7m, and a further £3.7m was added in the budget. Offset against this are drawings during the year and the City Schools planned transitional costs. This leaves forecast year end balances of £2.5m, and after allowing for a negative carry forward reserve of £0.5m key County council reserves are currently forecast at £2.0m at year end. This forecast position for the year end (less than 0.5% of the budget) is dependant upon the Directorates holding back expenditure of £1.7m (£0.869m Social & Health Care, £0.550m Environment & Economy, £0.250m Corporate Governance). There may still be calls on balances before the year end.
33. The major calls on general reserves in year came from: job evaluation, unbudgeted costs £0.3m; Supporting People Programme shortfall £0.450m; and overall deficit on the Directorate Carry Forward Reserve of £0.504m due to overspending in Learning & Culture now forecast at £2.6m.
34. The Council has been criticised by the District Auditor for its low balances, and there is a clear need to raise their level.

Schools Balances

35. In 2002/03, schools’ balances moved from £11.1m at 1 April 2002 to £7.5m at 31 March 2003, a reduction of £3.6m. The latest schools’ forecast balances at 3 March 2004 is an overall deficit of £2m. However, the Director for Learning & Culture and I have taken the view, based on the past actions of schools, that balances are more likely to be nil at year end than in deficit. Oxfordshire has been allocated Targeted Transitional Grant of £4.4m in 2004/05. This grant is available to help schools eradicate their deficits and can only be allocated where the school has a viable and robust action plan to balance the budget. I am, therefore, hopeful that the schools’ financial position will improve next year. But we do need to be aware that we can no longer rely on schools balances to help out with the Council’s financial position as we have sometimes done in the past, when schools have been asked to lodge their surpluses with the Council. Furthermore, if an overall deficit on schools’ balances was to occur, it would have to be covered by general or other unmarked reserves. This increases the pressure on the Council’s reserves.

Forecast Position for 2004/05 Reserves and Balances

36. The published MTFP allows for £1m to be added to general reserves next year and for the period up to 2007/08. I have proposed that a further increase of £2m be added and this is included in the revised list of expenditure proposals. On current forecast, this would take general reserves to around £3.7m. I have set out the position in detail at Annex C (download as .xls file). This would still be below 1% of net budget. I have set out my risk assessment at Annex D (download as .rtf file). This refers to the contingent liabilities stated in the accounts at 31 March 2003. There is the possibility next year that there may be a need to meet up to £1.9m of stated liabilities from general reserves. This potentially leaves only around £1.8m in general reserves and does not leave sufficient flexibility to meet all other unexpected pressures. My strong recommendation would be that general reserves should increase by a further £3m in total. That is £1m in the MTFP and the current expenditure proposal for £2m should increase to £3m. This would put general reserves at £4.7m as a minimum. This is still less than 1% of budget if the net budget is, say £543m.
37. Given that £1m was drawn from general reserves to cover the deficits on closed City Schools, I am recommending that the Director for Learning & Culture be asked to investigate whether the £1m can be repaid from excess receipts from the sale of City Schools. This will ameliorate the position on general reserves.
38. This injection should continue at £3m to be reviewed thereafter. By injecting a further £3m into general reserves (in addition to the £1m allowed for in the MTFP), balances rise to £7.7m in 2005/06, £10.7m in 2006/07, and £13.7m in 2007/08. This would achieve the 2% target set out in the Financial Strategy in 2007/08, assuming £1m is used from general reserves per annum. I strongly recommend that these proposals be adopted in the budget.

2005/06 and the Medium Term

39. Looking forward, the amount of flexibility to meet additional expenditure proposals in the 2005/06 budget is dependent upon: the budget requirement for 2004/05 and the full year effects of policy and budget plans which fall in 2005/06; the level of council tax increase required in 2004/05 and the target for 2005/06 and beyond; the ability of the Council to deliver £5m additional efficiency savings.

Estimated Total Formula Grant

40. I set out the prospects for 2005/06 in my report to the Executive on 28 October. The provisional settlement for Oxfordshire differs from the assumptions in the MTFP and we have also revised our assumptions about the likely level of increase in Total Formula Grant (TFG), in line with latest advice from the Somerset RSG Team. Therefore, I have looked again at the impact for the 2005/06 budget.
41. The MTFP assumes a 6.9% increase in TFG for 2005/06 in line with the national increase announced in the 2002 spending review. Based on the latest information from the Somerset RSG Team a 6.1% increase in TFG is currently expected and it seems prudent to base the forecast on this figure. The forecast grant is therefore an increase of 6.1% on the 2004/05 total of £333.7m giving a new total of £354.0m. This assumes that the additional £340m grant nationally continues in 2005/06. It is clear that it would be politically difficult to remove this additional funding but there has been no guarantee from government that this will continue.
42. The 6.1% increase includes an element for the transfer of the Preserved Rights specific grant.

Council Tax

43. The 8.3% increase in the published MTFP 2004/05 Council Tax of £949.77 gives a 2005/06 figure of £1028.77. However, a lower increase of 5.1% in 2004/05 produces a band D Council Tax of £914.76. Increasing this by 8.3% as per the Plan gives a 2005/06 figure of £990.69. This comes down to £960.50 if the increase in 2005/06 is 5%, in line with the notional 2004/05 increase.

Flexibility in 2005/06

44. Based on the new figures, a Council Tax increase of 5.1% in 2004/05 and an increase of 8.3% in 2005/06 would give a contingency or amount to allocate of around £23m. However this would reduce by: £3.4m to replace the preserved rights grant; £1.3m to pay for additional capital financing costs; and £0.3m for the full year effects of inflation; a total of £5m. It would reduce further by the full year effects of policy and budget plans approved in 2004/05: an estimate might be around £3m. Therefore, potential calls on the contingency of £23m would be £8m, leaving £15m to allocate. If there is a lower increase in 2005/06, the amount to allocate is reduced. Staying with an increase of 5.1% in 2004/05 and a similar increase of 5% in 2005/06 reduces the amount to allocate by £7m to £15.9m. The same reductions would apply (£5m plus £3m) leaving around £7.9m to allocate. Every reduction of 1% reduces the contingency by £2.1m.
45. All of the scenarios assume delivery of £5m efficiency savings. I have referred to the need to review the process for achieving the efficiency targets earlier in the report. The contingency available reduces by the exact amount of any failure to achieve the efficiencies target.
46. I will be bringing a possible five year MTFP to the 27 January Executive. This will include pressures and savings expected for future years. Not all of these have yet been factored into the budget. For example, there will be additional pension costs from 2005/06 due to the revaluation of the pension fund due to report next year. An early estimate is that £0.8m injection may be required from 2005/06. There are also other adjustments to factor in, including revised figures on the Homes for Older People contract. These would impact on the flexibility within the budget in future years. The figures at paragraph 44 are illustrative not definitive.

Outstanding Information

47. In the published MTFP we have assumed growth in the Council Tax base of 0.75% to £227,632 and Council Tax surpluses of £1.250m.
48. The District Councils must formally notify the County Council of its tax base and share of surpluses/deficits by 31 January, although they normally do so by about mid January each year. New legislation, the Local Government Act 2003, gives billing authorities the discretion to vary Council Tax discounts for second homes and long-term empty properties. Both types of property currently receive a 50% discount. The new regulations allow the discount for second homes to be reduced to a minimum of 10% and that for long-term empty properties to be reduced to nil. The effect of any reduction in discounts is to increase the tax base and therefore the amount of Council Tax that can be collected. The increase in tax base arising from a reduction in discount for second homes is excluded from the RSG tax base for grant purposes. Authorities therefore benefit from a reduction in the discount. For reductions in discounts for empty properties the increase in tax base is included in the RSG tax base and, therefore, there is no net gain. However for 2004/05 the RSG tax bases have already been notified to the ODPM. If the Districts decide to reduce the empty homes discount before setting their 2004/05 tax base, the County would benefit from a one-off increase in the tax base.
49. Latest information from the Districts suggests that Council Tax surpluses will only be around £0.600m. However, there should be an increase in tax base in 2004/05 due to the reduction in the second homes and empty property discounts (for those districts that have made this decision) equivalent to about £0.650m (about 750 Band D equivalent properties), giving a net effect of broadly the same as assumed in the MTFP. We have yet to be notified of Districts actual tax bases and surpluses/deficits.
50. The Final Settlement is expected in the week beginning 26 January. The Green Book Pay Award will not be known until March. We do not have final figures for all of our grant allocations; only £34m out of the £109m total is confirmed.

Timetable

51. The key dates for the budget process are:

• 10 January, Community Consultation Workshop;
• 14 January, the Executive agrees draft budget proposals;
• 20 January, Corporate Governance Scrutiny Committee offers comments on the draft proposals;
• 27 January, the Executive proposes a budget;
• 10 February, Council approves the budget

52. I have set out the impact on the MTFP of the Local Government Provisional Settlement which was received in two parts. Overall the effect is potentially to reduce the council tax increase, dependent upon the final budget requirement for the Council. If the budget requirement is increased by the additional amount for Education £4.3m and function changes £0.8m, the Council Tax increase becomes 5.1%. Every additional £1m adds 0.5% to the Council Tax.
53. The full list of expenditure proposals presented for comment by Scrutiny has been updated and issued separately as Budget & Oxfordshire Plan Document A7. The total comes to £25.8m. However some of these figures are still being refined.
54. I have appraised reserves and balances. I still have concerns around the level of schools’ balances, although the proper allocation of the TTG in 2004/05 along with careful advice and monitoring by the Schools Finance Team should mean that the deficits in schools are eradicated either by the end of 2004/05 or, in some cases, in the following 2 years.
55. Based on my current appraisal, I am recommending the addition of another £1m to the amount to be added to general reserves for 2004/05. This means an increase of £3m (£1m above the £2m set out in the expenditure proposals), which is in addition to the £1m already assumed in the MTFP. I cannot be definitive about the position, until I have seen the overall budget proposals on 27 January when I will give an assessment on the robustness of the proposed budget.
56. I have examined the expenditure proposals presented in A7. There is outstanding information from Learning & Culture and Social & Health Care, which needs to be available to inform the final budget setting process.
57. There may still be some flexibility to fund inflation at less than 3% and I am looking at this more closely. I have set out some initial proposals for further discussion. It may also be appropriate for Learning & Culture to repay the £1m to cover the deficits on the closed City schools which has been met from general reserves this year. The Director for Learning & Culture should be asked to investigate whether the first call on any surplus receipts for City Schools can be used to repay this amount.

RECOMMENDATIONS:

58. The Executive is RECOMMENDED to take the report into account in formulating draft budget proposals for 2004/05, and in particular to:

1. consider carefully the impact on 2005/06 and future years when proposing the budget for 2004/05;
2. ask the Director for Learning & Culture to investigate how the £1m paid from the general reserves this year to cover the deficit on the closed City Schools might be repaid from surplus receipts in 2004/05;
3. ask Directors to review the basis for above average inflation; and
4. note the latest revised advice on the level of general reserves.

CHRIS GRAY
Head of Finance

Background papers: Budget Papers D1 and D2

Contact officer: Jenny Hydari, Tel: 01865 815401

January 2004

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