AGENDA ITEM NO. 5(b)

REPORT TO: Executive Board

DATE: 11th October 2001

REPORTING OFFICER: Executive Director – Resources and Corporate Services

SUBJECT: Medium Term Financial Forecast

WARD(S): Borough-wide

1.0 PURPOSE OF REPORT

1.1 To set out the findings of the Medium Term Financial Forecast.

2.0 RECOMMENDED: That

(1) the Medium Term Financial Forecast be noted;

(2) the base budget be prepared on the basis of the underlying assumptions set out in the Forecast;

(3) further reports be considered by the Executive Board on the areas for savings and possibilities for growth; and

(4) the Forecast be used to consult with Headteachers concerning the Council’s financial scenario.

3.0 BACKGROUND

3.1 The Medium Term Financial Forecast sets out a three-year projection of resources and revenue spending. The implications of the forecast in terms of the scope for growth and the need for savings in 2002/03 onwards are then considered.

3.2 The projections made within the Forecast must be treated with a good deal of caution and require continuous updating as the underlying assumptions behind them become clearer. Nevertheless the projections do provide initial guidance to the Council on its revenue position into the medium term.

3.3 A medium term Forecast was produced in 2000 to cover the period 2001/04. This report rolls forward that Forecast to cover the period 2002/05.

3.4 The medium term forecast has been based on information that is currently available. Revisions will need to be made as new developments take place and new information becomes available.

EXB/11/10/9044/sah

4.0 POLICY IMPLICATIONS

4.1 The Medium Term Financial Forecast represents the “finance guidelines” that are required as part of the medium term corporate planning process. These guidelines identify the financial constraints that the Council will face in delivering its key objectives, and will form an important influence on the development of the Corporate Plan and Service Plans and Strategies.

5.0 OTHER IMPLICATIONS

5.1 In 2002/03 the spending required to maintain existing policies and programmes is expected to increase at a faster rate than the resources available to support it. Consequently there is a requirement to make savings just to maintain those existing policies. In addition further savings are required to meet the cost of any growth.

5.2 Levels of growth and savings will therefore be directly influenced by the decisions made concerning Council Tax increases. Higher Council Tax increases will reduce the level of savings that are required. Given the current capping regime there is considerable discretion concerning Council Tax increases.

6.0 LIST OF BACKGROUND PAPERS UNDER SECTION 100DOF THE LOCAL GOVERNMENT ACT 1972

Document Place of Inspection Contact Officer

Standard Spending Assessment Indicators 2001/02

Municipal Building Richard Gibson

Spending Review 2000Population Statistics

EXB/11/10/9044/sah

MEDIUM TERM FINANCIAL FORECAST

2002/03 TO 2004/05

Financial ServicesAugust 2001

EXB/11/10/9044/sah

EXB/11/10/9044/sah

1.0 INTRODUCTION

1.1 The Medium Term Financial Forecast sets out a three-year projection of resources and revenue spending. The implications of the forecast in terms of the scope for growth and the need for savings in 2002/03 onwards are then considered.

1.2 The projections made within the Forecast must be treated with a good deal of caution and require continuous updating as the underlying assumptions behind them become clearer. Nevertheless the projections do provide initial guidance to the Council on its revenue position into the medium term.

1.3 The Forecast represents the “finance guidelines” that are required as part of the medium term corporate planning process. These guidelines identify the financial constraints that the Council will face in delivering its key objectives, and will form an important influence on the development of the Corporate Plan and Service Plans and Strategies.

1.4 A medium term Forecast was produced in 2000 to cover the period 2001/04. This report rolls forward that Forecast to cover the period 2002/05.

2.0 FORECAST OF EXTERNAL SUPPORT

2.1 The external support received by the Authority consists of two elements, Revenue Support Grant (RSG) and National Non Domestic Rates (NNDR). External support funds 80% of the Authority’s Net Revenue Budget, the remaining 20% being generated by Council Tax.

2.2 The level of external support received from Central Government is clearly the key factor in deciding the overall level of resources available to the Authority. This is normally defined as the Standard Spending Assessment (SSA) for the Authority less the amount of income that the Government calculates that the Authority will generate through its Council Tax levy.

2.3 In 2001/02, using the system outlined above for calculating the level of external support, the Authority would have received £95.4m from Central Government, an increase of just 0.6%. This small increase in external support was due to large data loses within the SSA formula caused by reducing population, falling school rolls and new data on road lengths and traffic flows. To combat the effects of such small increases the Government introduced “floors and ceilings” to the SSA process to ensure that all Authorities received a reasonable increase in grant and that no Authority received an unduly large increase. This ensured that Halton received a minimum 3.2% increase taking the actual amount of external funding received to £97.2m.

2.4 Government has indicated that this safety net is set to continue for 2002/03 though the level of the ‘floor’ is yet to be announced. Clearly this will have a major impact on the resources available to the Authority next year. For 2002/03, it is likely that Halton will remain on the ‘floor’, thus the Authority

EXB/11/10/9044/sah

continues to rely on the minimum increase in external funding set by Government under ‘floors and ceilings’.

2.5 Last year the floor was set at inflation plus 1%. If this formula was repeated for 2002/03 the floor would again be lifted by 3.2%, although this will not be confirmed until the RSG provisional settlement at the end of November.

2.6 However, the level of external funding received needs to be adjusted in order to reflect the transfer of functions in and out of Local Government control and any changes in funding arrangements for 2002/03 onwards. These include the full year effect of the new Care Leavers Grant and the transfer of Sixth Form Education responsibilities from local authorities to the Learning and Skills Council. These changes result in a corresponding increase or decrease in the budget requirement for the Council which are likely to be brought into account before the floor uplift is applied.

2.7 The transfer of Sixth Form Education responsibilities from local authorities to the Learning and Skills Council (LSC) mean that the associated budgets will also transfer. The Government has stated their intention to match as closely as possible the sum transferred from the Authority’s SSA allocation to the sum it receives from the LSC. For Halton this will result in a balance of post 16 SSA which may be transferred from the Council in the following year. The Government have assumed the transfer of Sixth Form Education to have a net nil impact for Local Authorities in 2002/03, however, the Government expects to see more wide-ranging changes to Education funding which are likely to be included in the 2003/04 settlement.

2.8 Next year the Government are to introduce free nursing care to residents in Social Services accommodation, paid for by the NHS. As a result, a transfer of resources from SSA to the health service will take place. A number of options are still being considered which will reduce the SSA by about £1m.

2.9 Also, the National Care Standards Commission will take responsibility for the registration and inspection of residential accommodation. This is likely to lead to a reduction of £247,000 in SSA next year.

2.10 The forecast of external funding over the next 3 years is shown in Table 1 below.

Table 1 – External Funding Forecast 2002/03 to 2004/05

(£’000) 2002/03 2003/04 2004/05Previous Years External Funding 97,207 96,705 99,172Adjusted for:Sixth Form Funding (1,858) (608) 0Care Leavers Grant (396) 0 0Free Nursing Care (1,000) 0 0Registration and Inspection (247) 0 0Adjusted Base Funding 93,706 96,097 99,1723.2% Increase 2,999 3,075 3,174

EXB/11/10/9044/sah

FORECAST EXTERNAL FUNDING 96,705 99,172 102,3462.11 It is possible that the Authority may come off the ‘floor’ in future years but

this is dependent on a number of complex variables. For the purpose of the forecast it has been assumed that the Authority will remain at the floor for at least the next 3 years.

2.12 Despite the fact that the Authority finds itself at the ‘floor’, the SSA for the Authority still constitutes an important part of the financial planning process. SSAs are calculated using a wide range of current and historical data from all local authorities. Factors that are taken into account include demographic, geographical, social and economic characteristics. Any increase or decrease in the Authority’s SSA will depend on how its characteristics change relative to the national picture for all authorities in England.

2.13 SSAs can be analysed over the following main areas;

National SSA Control Totals – which reflect the total amount of funding that Central Government is putting into the SSA system,

Relative Data changes including the area cost adjustment (ACA) – which reflect the varying needs of local authorities, (see 2.18),

Methodology – which reflects the formula that Central Government uses to distribute funding between local authorities.

Transfer of Functions – which reflect the changes in responsibility and funding made by the Government (see 2.6).

2.14 The Government has extended its freeze on SSA changes for a further year, therefore there has been no change to the methodology of the SSA formula for 4 years. However, the Government has announced its intention to introduce a new fairer, simpler system of grant distribution from 2003/04 and this will have a major impact on the Authority’s external funding. A White Paper is expected to be published in the Autumn 2001, the implications of this will be fed through in to the Medium Term Financial Forecast in due course. As a result no figures have been forecast for the SSA beyond 2002/03. Table 3 below sets out the projected SSA for the Authority for 2002/03.

Table 2 – Estimated SSA for 2002/03

Projected increases -Year on year change

2002/03 2003/04 2004/05National SSA Control Totals 5.4%

N/A N/A

Relative Data changes -1.2%Area Cost Adjustment 0.5%Methodology changes 0.0%Unadjusted Increase 4.7%Transfer of function to / (from) Local Authority Control

-2.9%

Percentage Increase in SSA Total 1.8%

EXB/11/10/9044/sah

Note – the SSA increased by 5.9% in 1999/00, 3.6% in 2000/01 and 2.2% in 2001/02.

2.15 On the basis of a 1.8% increase, the SSA for next year it is estimated to be £121.5m. At this value, the Council’s external funding would be below the floor by about £0.5m, which would result yet again in the Authority receiving the floor increase in external funding.

2.16 The Government has set out the SSA national control totals for the period from 2002/03 to 2003/04 in last year’s spending review. The increases in the control totals used in the forecast are shown in the following table.

Table 3 – Increase in SSA Control Totals 2002/03

Education 6.0%Social Services 5.4%Fire 4.0%Highways Maintenance 2.6%EPCS 4.4%Capital Finance (excluding PFI) 8.3%

Total 5.4%

2.17 It will be noted that the control total for the Education SSA is expected to increase by 6% before any data changes. The Government places pressure on Local Authorities to increase Education spending by at least the increase in Education SSA and Local Authorities that do not reach this target face “naming and shaming”. Given that the Council’s funding from Government is likely to be set at the floor of 3.2%, it is likely that there may be a shortfall of £600,000. Additional funding of Education at this level could only be made at the expense of other services in the Borough, and therefore the Forecast does not assume that spending on Education will match the increase in SSA.

2.18 In practice it is extremely difficult to accurately predict changes in the data factors that are used to calculate SSAs. Consequently it should be recognised that this area of the Forecast is subject to a significant margin of error. Table 4 shows the sources used to estimate future population and pupil numbers.

Table 4 – Sources of SSA Data

SSA Data SourcePopulation ONS 1996 Population ProjectionsSchool Pupil Numbers Education Directorate January 2001 pupil forecasts

2.19 For Halton, the most important factors are shown below, if these trends continue in future years they are likely produce a severe adverse effect on the SSA total for the Authority, in turn this will place constraints on future spending;

The continuing decrease in the local population relative to the increase population nationally, which may reduce the SSA by £275,000.

EXB/11/10/9044/sah

The continuing fall in pupil numbers at a greater rate than the fall in pupil numbers nationally, which may reduce the SSA by £1.1m.

2.20 In 2001/02 the Authority lost £1.2m from its Highways SSA, a drop of 14%. The Authority is in contact with DTLR and GONW and it is hoped that, in respect of road lengths some of these losses can be reversed in time to be reflected in the 2002/03 settlement. With respect to the traffic flow figures it is hoped that the current round of surveys being undertaken will show flows in line with previous years figures and that these will be reflected in the Authority’s SSA in future years. At this stage no adjustment has been made for Highways SSA.

2.21 Recent figures from the DTLR suggest that updated earnings data which is used to calculate the Area Cost Adjustment (ACA) will result in additional SSA of about £600,000 for Halton next year. This reverses the loss from 2001/02.

3.0 COUNCIL TAX FORECAST

3.1 In 2001/02 the Council Tax for a Band D property is £738.48 (excluding police and parish precepts) which will generate income of £25.9m. Since Council Tax income funds only 20% of the Net Revenue Budget a 1% increase in budget would require a 5% increase in Council Tax. This is known as the gearing effect and places practical constraints on the budget that can be set because of the implications this has on Council Tax rises.

3.2 When setting Council Tax levels it is clear that higher increases enable more growth in spending and/or reduce the requirement to make savings. However, there are a wide number of factors that need to be considered when determining the appropriate increase in Council Tax. These factors include:

Halton has the 2nd lowest Council Tax level in the North West and the 21st lowest in England,

The national average increase in Council Tax was 6.4% in 2001/02, 6.1% in 2000/01 and 6.8% in 1999/00, over the previous 3 years the Authority has increased its Council Tax by 5.5%, 8.5% and 9.0%,

The Government’s inflation target is 2.5% per year,

The Government is likely to continue to exert strong pressure for restraint in Council tax increases with Government’s guideline increase for the Council Tax Benefit Subsidy Limitation (CTBSL) scheme set at 4.5%.

3.3 The Government retains the right to control “excessive” Council tax increases. These reserve powers were introduced for the financial year 2000/01 and consider both budget and council tax increases over a number of years. Over the last two years the Government has decided not to cap any Council.

EXB/11/10/9044/sah

Consequently it is clear that in this financial environment the Council has a large degree of discretion to determine its Council Tax level without the threat of capping. The Forecast incorporates a range of Council Tax increases from 4.5% to 9%.

3.4 The severity of the gearing effect has been increased by the introduction of the Council Tax Benefit Subsidy Limitation (CTBSL) scheme. Under this scheme if a Council Tax increase is deemed “excessive”, a proportion of the benefit subsidy paid by the Government is withheld. The subsidy that is lost must then be funded through higher levels of Council tax.

3.5 The CTBSL scheme started in 2000/01 and is run on a cumulative basis so that all increases are judged relative to the Council Tax level set in 2000/01. At that time Halton’s Council Tax was one of the lowest in the country and despite it still being amongst the lowest it is already above the guideline for next year. Therefore the Authority would need to reduce the Council Tax in order to avoid any penalties. The penalty for increasing Council Tax above the recommended level is compounded year on year resulting in ever increasing penalties. For example, in 2000/01 Halton lost £119,000 through CTBSL, in 2001/02 this rose to £299,000. The penalty in 2002/03 is dependent on the actual increase in Council Tax for next year, as shown below.

Table 5 – Council Tax Benefit Subsidy Limitations 2002 to 2005

Council Tax Increase 2002/03 2003/04 2004/054.5% 313 327 3426.0% 371 449 5347.5% 429 573 7339.0% 487 698 936

3.6 The Authority, in conjunction with the other members of SIGOMA, is lobbying Government to have this unfair burden removed. Although there is no firm Government proposal there have been some tentative soundings that Government may be prepared to abolish the CTBSL scheme in the future.

3.7 Table 6 below, estimates the net amount of Council Tax income that will be produced for a given increase in Council Tax for the next 3 years. This Forecast takes into account contributions from the surplus on the Collection Fund and the scheme for Council Tax Benefit Subsidy Limitation.

Table 6 – Council Tax Income for 2002 to 2005

Projected Increases inCouncil Tax Income (£’000)

2002/03 2003/04 2004/05

4.5% 1,166 1,220 1,2756.0% 1,556 1,650 1,7157.5% 1,945 2,019 2,0899.0% 2,334 2,347 2,536

EXB/11/10/9044/sah

3.8 The Government has also announced its intention to carry out a ten year cycle of council tax revaluations in England. Work will begin in 2005 leading to council tax bills based on updated property values from 2007 onwards. Although this will not lead to a change in the total amount of council tax raised in England as a whole, this should be of benefit to the Northwest which has had lower increases in house values than in London and the Southeast.

4.0 SPENDING FORECAST

4.1 The Spending Forecast estimates the increases in revenue expenditure that will be required over the next three years in order to maintain existing policies and programmes. In effect this represents an early estimate of the base budget requirement using the limited information that is currently available.

4.2 The scope of the Forecast covers General Fund revenue activities that are financed through Revenue Support Grant, Non Domestic Rates and the Council Tax. The Forecast does not directly consider the Housing Revenue Account or the Capital Programme, as these areas are covered by separate funding systems.

4.3 Table 7 outlines the Spending Forecast which highlights likely increases of 4.6%, 4.3% and 4.8% over the next three years.

Table 7 – General Fund Medium Term Spending Forecast

Increase in Spending required to maintain existing policies and services

Year on year change (£'000)2002/03 2003/04 2004/05

Pay and price inflation 3,655 3,777 3,904Priorities Fund 500 500 500Commitments from 2001/02 204 -229 0Capital financing costs 710 740 630Treasury management 325 28 28Changes in pupil numbers -330 -615 -614Contingency for future years 616 1,232 1,848One Stop Shop 41 56 56TOTAL INCREASE 5,721 5,489 6,352FORECAST INCREASE (%) 4.65% 4.31% 4.77%Transfer of Functions

Care Leavers Grants - - -6th Form Funding -1,858  - -Free Nursing Care -1,000  - -Registration & Inspection -171  - -Preserved Rights/Residential Allowances +300 - -

NET INCREASE 2,992 5,489 6,352Note – the base budget increased by 4.9% in 1999/00, 4.2% in 2000/01 and 3.9% in 2001/02.

EXB/11/10/9044/sah

4.4 Included in the forecast is the planned increase to the Priorities Fund of £0.5m over each year in the forecast. The Priorities Fund has been established to channel extra resources year on year to tackle the 5 key priorities set out in the Corporate Plan which in combination address the overall aim of making Halton a better place to live and work. In addition, the Council is committed to prepare the Unitary Development Plan, which is estimated to cost an additional £204,000 next year and is included in the Forecast.

4.5 Pay and price inflation is the single most important factor in the Forecast, and is projected to cause a £3.6m increase in the spending requirement for 2002/03. Table 8 shows the main bases that were used to compile the inflation estimates. In particular the forecast assumes teacher pay to increase by 3.5% and other pay by 3.0% each year over the period. Fees & charges and other income will need to increase by 3.0% per year to match the increase in costs.

4.6 Now that inflation is at historically very low levels it has been assumed in the forecast that many items of supplies and services expenditure can be cash limited. This will be insignificant at the individual budget level but will generate significant savings of about £200,000 at the aggregate level. However, it would not be prudent to cash limit certain types of expenditure. Where appropriate a rate was used which more accurately reflects the true picture of future prices. In addition an inflationary increase of 4.0% in each of the next 3 years was used to calculate future expenditure on the Fire levy, the information was provided by Cheshire Fire Authority.

Table 8 – Summary of Inflation Rates

Standard Inflation Rates, % 2002/03 2003/04 2004/05Teachers pay award 3.5 3.5 3.5Pay awards for all other staff 3.0 3.0 3.0Supplies & Services Expenditure 0.0 0.0 0.0Agency Fees 3.0 3.0 3.0Sales, Fees and charges 3.0 3.0 3.0

4.7 In recent years the cost of increments were added to the budget. However, now that Halton has been operating as a Unitary Council for a number of years many members of staff will be at or near the top of their grade. As a result the cost of increments should reduce considerably. Furthermore, as staff on higher scale points leave and are replaced by staff at the bottom of the grade, the salary savings should more than meet the cost of any increments. Consequently, no provision has been made in the forecast for the cost of increments.

4.8 A key assumption that has been used in constructing the Forecast is that total spending in 2001/02 is kept within the overall budget. In other words it is anticipated that there will be no issues arising in 2001/02 that have a budgetary impact in later years. In particular it is difficult to control ‘demand led’ budgets such as children in care or match funding requirements such as standards funds. The forecast assumes any budgetary pressures in the demand for services or match funding will be addressed through the growth process.

EXB/11/10/9044/sah

4.9 In this context it is important to consider the contingency for uncertain and

unexpected items. The budget for this contingency in 2001/02 is £0.5m. It is expected that this budget will be fully allocated during the year. The forecast assumes a contingency equivalent to 0.5% of the total net budget (£616,000) in 2002/03, and to take account of increasing uncertainty and lack of information the contingency increases to 1.0% (£1,232,000) in 2003/04 and 1.5% (£1,848,000) in 2004/05.

4.10 The Forecast has identified that capital financing costs are anticipated to increase significantly over the period of the Forecast. This can be explained partly through the change in funding arrangements for the Local Transport Plan (LTP) and partly due to LGR transitional borrowing costs.

4.11 The Local Transport Plan is now funded through Credit Approvals rather than through specific grants. The expansion in borrowing that will result from this new funding mechanism will increase the Council’s debt costs by £530,000 in 2002/03. When the new financial arrangements were put in place they were designed to have an overall net nil impact because the increase in debt costs were to be matched by increases in the debt charges element of the Capital Financing SSA and thereby RSG. However, because the Authority is now on the ‘floor’ it does not receive any additional RSG to fund the LTP. This is clearly an unexpected and unwelcome side effect of the introduction of floors & ceilings and the issue has been raised with SIGOMA and DTLR officials as well as our local MP.

4.12 The revenue consequences of LGR transitional borrowing started to impact from 2001/02. With this type of borrowing there is a four-year period in which no debt costs are charged to revenue. However, once this period ends, the total amount borrowed must be repaid within seven years. Due to this staggered repayment the cost of this borrowing is set to rise from £0.55m in 2001/02 to £0.75m in 2002/03 to a high of £1.1m in 2004/05. The full cost of the borrowing will not be repaid until 2010/11 although the level of repayment is significantly reduced from 2008/09 onwards.

4.13 Treasury Management income is mainly generated through interest on temporary investments. This income is forecast to fall significantly over the medium term as a result of the use of capital receipts to fund the capital programme and the expected fall in interest rates.

4.14 Projections indicate a continued fall in pupil numbers over the period. The forecast has estimated the impact on school budgets using these projections. These estimates need to be treated with a significant degree of caution because pupil projections can be subject to a significant margin or error. Actual school budgets would only be adjusted during budget setting to reflect more concrete information on pupil numbers.

4.15 The first phase of the Halton Direct Link system is now complete, with the opening of the One Stop Shop at Halton Lea. Two further One Stop Shops are due to open next year and there are plans to develop a telephone contact

EXB/11/10/9044/sah

centre. In addition to the significant capital costs, there are also annual revenue costs. The aim is to recover these costs by making savings by rationalising staffing and accommodation and improving efficiency and accommodation. The overall aim is for the initiative to be at least self-financing in the long term, but in the short term the running costs of the new buildings have been included in the Forecast.

4.16 The Superannuation Fund is subject to an actuarial review effective from April 2002. There are no known changes in the employer’s rate at this point in time and the Actuary has indicated that, in overall terms, a change in the rate is unlikely.

4.17 The forecast assumes that any costs arising from Single Status/Harmonisation will either be accommodated within existing budgets or matched by off-setting savings. If this is not the case, then any cost increases resulting from these issues would need to be treated as a growth bid.

4.18 As indicated in paragraph 2.6, there are a number of functions transferring in and out of Local Government which will result in changes to budgets.

4.19 As regards 6th Form Funding, Government have indicated that there should be a net nil impact for this change and this is incorporated in the Forecast.

4.20 The cost of Free Nursing Care is not yet known, and at this stage the Forecast assumes that the cost will equate to the value of the SSA transfer. This assumption in particular will need to be kept under review.

4.21 More budget information is known about the remaining transfers of Care Leavers, Registration and Inspection and Preserved Rights/Residential Allowances. This suggests that there is an imbalance between budgets and SSA which will result in a loss to the Council of £772,000.

5.0 SUMMARY

5.1 In 2002/03 the spending required to maintain existing policies and programmes is expected to increase at a faster rate than the resources available to support it. Consequently there is a requirement to make savings just to maintain those existing policies. In addition further savings are required to meet the cost of any growth.

5.2 Levels of growth and savings will therefore be directly influenced by the decisions made concerning Council Tax increases. Higher Council Tax increases will reduce the level of savings that are required. Given the current capping regime there is considerable discretion concerning Council Tax increases.

5.3 The medium term forecast has been based on information that is currently available. Revisions will need to be made as new developments take place and new information becomes available.

EXB/11/10/9044/sah