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Executive summary


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Executive summary

  1. 1. LIVERPOOL CITY COUNCIL BUDGET REPORT FINANCIAL FORECASTS 2007/08 to 2009/10 Report of the Chief Financial Officer - Phil Halsall (Executive Director) Contact Officer: Robert Corbett (AED Financial Management) Tel: 225 2200 Ref: v/Budget 0708 - Financial Forecast Report 2007-09/10 1
  2. 2. BUDGET REPORT FINANCIAL FORECASTS 2007/08 to 2009/10 CONTENTS PAGE Executive Summary 3 Introduction 5 Budget Process 2007/08 5 Local Government Finance Settlement 2007/08 6 Dedicated Schools Grant (DSG) and Schools Budgets 7 Council Tax Tax-Base Calculation 9 Collection Fund Balances 2006/07 10 Council Tax Options 11 Maximum Budget Requirement 2007/08 12 Financial Forecasts 12 Budget Gap 2007/08 21 Medium Term Financial Plan 2008/09 and 2009/10 22 Value for Money 23 Precepts 24 Responsibilities of the Chief Financial Officer 24 Abbreviations 26 Annexe A – Statement of Vision, Aims and Priorities Annexe B – Outline Budget Process Timetable for 2007/08 Annexe C – General Fund Summary of Financial Forecasts Annexe D – Forecast of Reserves Annexe E – Government Grant Assumptions Annexe F – Unsupported Borrowing commitments 2
  3. 3. Liverpool City Council Budget Report Financial Forecasts 2007/08 to 2009/10 Executive summary The key features of this Budget Report are as follows:- • The Government has made no change to its previous assessment of the City Council’s entitlement to Formula Grant for 2007/08 of £297.184m; • Continuing decline in number of school pupils results in a Dedicated Schools Grant for 2007/08 of £262.014m; • Pending the outcome of its Spending Review 2007 and the recommendations of the Lyons Enquiry, the Government has given no forward indications of the level of future support for local government beyond 2007/08; • The Council Tax tax-base represents the estimated amount of Council Tax income the Authority will raise from each £1 of Council Tax levied – the City Council has determined its Council Tax tax-base for 2006/07 at £128,815.07p and is based upon an estimated collection rate of 97.125%; • There is an estimated deficit on the Council Tax element of the Collection Fund for 2006/07 of £4.5m, offset in part by a community charge collection surplus of £0.2m – the net City Council proportion to be taken into account in setting the 2007/08 Council Tax is £3.7m; • The maximum Budget requirement for 2007/08 for the current level of Council Tax is £701.486m; • The Government has indicated that it may consider Council Tax increases above 5% as “excessive” and may, therefore, take intervention action requiring the Authority to reduce its Budget and Council Tax requirements; • The maximum resource availability for 2007/08 with a 5% increase in Council Tax is £708.226m; • Financial forecasts for 2007/08, 2008/09 and 2009/10 identify forecast spending at the current service levels and for known commitments as follows:- 2007/08 2008/09 2009/10 £m £m £m Net Expenditure Forecast 748.732 792.450 814.791 3
  4. 4. • The financial forecasts provide for working balances of £9m in 2007/08 increasing to £11m in 2009/10; • The financial forecasts provide for increases in reserves of £1.050m to ensure that the Council’s Belwin emergency contribution is fully provided for and that there is a progressive increase in the reserve with a potential claw-back of grant; • A number of Contingent Liabilities have been identified but at this time do not require the establishment of specific provisions or reserves; • The financial forecasts anticipate specific and special grants of £439.257m during 2007/08; • The financial forecasts anticipate revenue financing costs of unsupported borrowing to meet approved capital expenditure, progressively increasing to £7.6m per annum by 2009/10; • The Capital Funding strategy anticipates useable capital receipts of £4.5m; • The Budget Report identifies a Budget Gap for 2007/08 of between £47.1m and £15.2m depending upon: o the increase in Council Tax, o the decision taken in respect of Council Tax discounts on long term vacant properties, o the success of executive and management actions to offset or address spending pressures identified in 2006/07, o whether the full saving effect from Gershon cash efficiencies is taken into account. Therefore, Budget Proposals including a Council Tax strategy need to be considered and determined by the City Council at its Budget meeting on 7th March 2007. 4
  5. 5. Introduction There is a statutory obligation upon the Council to determine its General Fund Budget and Council Tax requirements for each financial year on or before the preceding 10th March. There is also a Comprehensive Performance Assessment (CPA) key Line of Enquiry (KLOE) relating to financial management that: “The Council has put in place a Medium Term (3 year) Financial Strategy which is linked to its key strategic objectives, and takes account of both local improvement priorities and national priorities.” This report is intended to advise on the current financial information and to assist Members in considering issues to be taken into consideration in preparing a Budget for 2007/08 and a Medium Term Financial Strategy for the 3 year period 2007/08 to 2009/10. Budget Process 2007/08 The following is a brief outline of the City Council’s Budget Process for 2007/08. • summer 2006 - Portfolios review current levels of spending and commitments with regard to a forecast of likely Government support; • late November 2006 – provisional Local Government Finance Settlement 2007/08; • December 2006 – review of Portfolio spending forecasts and Budget Proposals with regard to the provisional Local Government Finance Settlement; • mid January 2007 – commence consultation with local stake-holders on proposed Budget strategy; • January 24th 2007 – City Council consider and determine its HRA Budget Strategy for 2007/08; • late January 2007 – final Local Government Finance Settlement; • February 26th 2007 – Schools Forum consideration of Schools Budget proposals; • February 2007 – finalise Budget proposals, having regard to consultation responses from local stake-holders; • February 28th 2007 – Budget proposals presented at Resources & Corporate Services Select Committee; • March 7th 2007 – City Council consider and determine its Budget and Council Tax for 2007/08 and its Medium Term Financial Strategy for 2007/08 to 2009/10. 5
  6. 6. A more detailed Budget timetable for 2007/08 is set out in Annexe B. Local Government Finance Settlement 2007/08 On the 31st January 2006, the Government finalised the Local Government Finance Settlement for 2006/07 and its forward settlement for 2007/08. This was the first time that the Government had given a two year settlement and enabled local authorities to plan with more certainty, as to the level of Total Formula Grant support available. However, the Government is still required to issue a provisional Local Government Finance Settlement each year and to consult on its proposals. Therefore on the 28th November 2006 the Government published its provisional Local Government Finance Settlement for 2007/08. The provisional Settlement for 2007/08 has simply confirmed the revenue Total Formula Grant figures previously announced for 2007/08 and how this would be allocated to individual authorities. However, the Government has retained ‘Floor Damping’ as one of the elements to ensure authorities receive a minimum level of increased Total Formula Grant support. For 2007/08 the ‘floor’ (or minimum grant increase) has been set at 2.7%. Whilst population has now stabilised, the data used is drawn or extrapolated from the 2001 census, consequently Liverpool’s share of the resources available would have been less had the Government’s ‘floor’ guaranteed protection not been in place. The application of the ‘floor’ support has meant that the cash grant to Liverpool is £14.2m greater than it would otherwise have been. As a result, the Council will receive £297.184m Total Formula Grant support in 2007/08. This level of grant support represents an increase of 2.7% above that received for 2006/07, adjusted for changes from specific to general grant support and other issues. This compares with a reported average increase of 4.9%. During 2007 the Government is undertaking its comprehensive Spending Review of public sector spending, including that provided by local government. The Government has given no indication of its likely financial support to local government in future years. It has however, committed to providing local authorities with 3 year financial settlements commencing with 2008/09. The Government is also committed to having regard to the recommendations of the Lyons enquiry into local government finance as part of its Spending Review considerations. Therefore, there is considerable uncertainty as to what future local government finance arrangements may be. It is unlikely that the Government will immediately remove its ‘floor’ guarantee protection and therefore, for financial planning purposes, the City Council should assume that future Government grant support will continue to increase annually by 2.7% per annum. 6
  7. 7. On this assumption, the profile of Government support over the Council’s Medium Term Financial Strategy period would be as follows:- 2007/08 2008/09 2009/10 £m £m £m Government grant support 297.184 305.208 313.449 Dedicated Schools Grant (DSG) and Schools Budgets For 2006/07 the Government introduced the Dedicated Schools Grant (DSG) as the primary support towards the Schools Budget. The DSG is a specific grant and cannot be used for alternative purposes as outlined in legislation. The Schools Budget is the legal term used to bring together both individual school budgets and resources retained centrally by the Local Authority on behalf of its Schools. The resources the Government have provided within the DSG is made up of delegated funding to maintained Schools and resources for a number of key national Funding Priorities. The resources for the key national Funding Priorities are distributed on the Governments perceived basis of need. The core support to Schools is predominantly distributed on a ‘per pupil’ basis. The City Council’s pupil numbers have shown a continuous decline in recent years and this trend is forecast to continue. 80,000 75,000 70,000 65,000 60,000 55,000 50,000 2 6 0 1 3 4 5 7 8 9 /0 /0 /0 /0 /0 /0 /0 /1 /0 /0 01 05 09 01 02 03 04 06 07 08 20 20 20 20 20 20 20 20 20 20 7
  8. 8. The Government has given no indication of the likely DSG per pupil beyond 2007/08, pending the outcome of its Spending Review 2007. However, between 2006/07 and 2007/08 the DSG per pupil increased by approximately 7%. For financial planning purposes the annual increase beyond 2007/08 has been assumed at 6%. The following are therefore the key indicative figures for the next three financial years, 2007/08 2008/09 2009/10 Pupil numbers forecast 63,344 61,612 58,937 DSG ‘per pupil’ £4,136.36p £4,384.54p £4,647.61p DSG £262.014m £270.134m £278.299m It should be noted that pupil numbers for DSG purposes include 2 and 3 year olds in private and voluntary provision and exclude post-16 pupils. The final level of DSG will be determined upon the verification of January 2007 pupil numbers in May 2007. If there is any further decline in pupil numbers the eventual DSG received will be less than this forecast and be subject to grant claw-back. Therefore, it is therefore prudent to be cautious about the level of DSG to avoid the need for service and financial decisions to be taken after the start of the financial year. However, within the level of DSG awarded local authorities are required to provide a Minimum Funding Guarantee (MFG) to Schools, based on DFES calculations of local cost pressures. The actual individual schools budget shares will be flexed on the movement in pupil numbers. For Liverpool, this means that each School must receive a minimum funding increase ‘per pupil’ of:- Sector 2007/08 % Primary (incl. Nurseries) 3.7 Secondary 3.7 Special 3.7 LSC Post-16 3.7 The Government has not yet set Minimum Funding Guarantees for the 208/09 and 2009/10. The Learning & Skills Council (LSC) is also committed to mirror the funding support pledged to the secondary sector for Post-16 pupils, with the distribution of such resources driven by their targeted formula. The indicative allocation from the Learning & Skills Council for 2007/08 is £25.775m. 8
  9. 9. In addition to the DSG and Learning and Skills Council contribution, the Government is continuing with its support through the Schools Development Grant (incorporating a number of Standard Fund grants) and the Schools Standard Grant. In general, the Government is increasing the use a ‘per pupil’ basis for the distribution of such grants rather than any assessment of specific needs. However, some school Standards Grant Funding is being allocated based on attainment and deprivation indicators at a school level. The overall level of such grant support for 2007/08 has yet to be announced by the DFES. However, the Council could choose to increase the resources available to Schools beyond those provided directly by the Government. In which case, such resources would need to be provided for within the Council’s overall Budget. In the absence of any additional resources from the Council, the net Schools Budget must equal the value of the Dedicated Schools Grant indicated above. Council Tax Tax-Base Calculation The Council Tax tax-base represents the estimated amount of Council Tax income the Authority will raise from each £1 of Council Tax levied. To determine the tax-base the calculation outlined below is undertaken to arrive at the figure for Band D equivalents. The Band D equivalent figure is then divided by the amount of money that is required to be raised locally to support the Authority’s General Fund revenue expenditure to produce the Council Tax (Band D). The City Council as the Billing Authority is required by the 31st January of each year to calculate the Council Tax tax-base for the City based on the valuation list and other information and estimates. The method of calculation is contained in regulations. Each Council Tax valuation Band has to be calculated to its Band D equivalent by applying the calculations, estimates and proportions contained in the regulations. The total Band D equivalent figure is then multiplied by the estimated collection rate (i.e. 100% less percentage for bad debt provision) to obtain the Council Tax tax-base for the year. Provisionally the Council Tax tax-base calculation has been based upon their being 131,000 Band D equivalent properties and that the overall Collection Rate will be 97%. Supporting this assessment are the assumptions that first year Collection Rate will be 90% and that there will be an annual reduction in the level of arrears of £13m (at 2007/08 prices). A more detailed report on the determination of the Council Tax tax-base will be considered and presented to the Executive Board on 26th January 2007. For the purpose of forward financial planning it is recommended that the Council Tax tax- base figure and the forecast collection rate for 2007/08 be used also in respect of the financial forecast for 2008/09 and 2009/10. 9
  10. 10. Collection Fund Balances 2006/07 Each billing authority is required to maintain a Collection Fund and to make a determination on the 15th January of each year, of what its Collection Fund balances are estimated to be as at the 31st March of that year. This estimate is then used by both the billing authority and precepting authorities in assessing their Council Tax and precept requirements for the following financial year. Since determining the Collection Fund for 2006/07 in March 2006, there have been a number of significant movements which are affecting the estimate of Collection Fund balances. These were detailed within the Half Year Financial Review 2006/07 (FMS/42/06). The overall effect was an estimated forecast deficit on the Council Tax element of the Collection Fund of £5.999m, offset in part by a Community Charge collection surplus of £0.150m. However, since that report was considered the Council has received notification that its entitlement to income from the National Non Domestic Rates pool has increased by £1.366m and therefore, the current overall forecast deficit is £4.383m. The City Council as billing authority is also considering its discretionary policy towards providing a Council Tax discount on long term vacant properties. Should the Council change its policy and no longer provide for such a discount, then the net additional income to the Collection Fund for 2007/08 has been estimated as £3.3m. There is however, no net improvement in future years as the Government will take the increase into account in future grant settlements. Therefore the potential Collection Fund forecast deficit could be as low as £1.1m. A decision on this matter will be made when the Executive Board determines the Council Tax tax-base at its meeting on the 26th January 2007. However, currently the financial forecasts do not anticipate any decision to change current policy. The estimated Council Tax deficit balance will be apportioned between the City Council and the precept authorities in the same proportion as their demands on the Collection Fund for the year in which the estimate was made. The entire Community Charge surplus rests solely with the City Council. The apportionment of the current forecast Collection Fund deficit is as follows:- Proportion of Demand on Potential Proportion of Collection Fund Council Tax Community Charge for 2006/07 Deficit Surplus £m £m £m City Council 148.306 3.864 -0.150 Police Authority 15.646 0.415 NIL Fire Authority 7.190 0.254 NIL ______ ____ ______ 171.142 4.533 -0.150 10
  11. 11. Council Tax Options The current levels of Council Tax for 2006/07 are as follows:- £:p Band A 767.54 Band B 895.46 Band C 1,023.39 Band D 1,151.31 Band E 1,407.16 Band F 1,663.00 Band G 1,918.85 Band H 2,302.62 The Government has not set a Council Tax cap or budget requirement limit as part of this year’s Settlement. However, it still has a reserve power to direct a local authority to set a lower budget requirement if it considers the budget requirement and Council Tax have increased by ‘excessive’ amounts. In announcing the Local Government Finance Settlement the local government Minister expressed the view that the level of Settlement “…. means there is no excuse for excessive Council Tax increases next year.”, and that he “…. again expected the average Council Tax increase to be below 5% and that the Government was prepared to take capping action if necessary.” It is considered likely therefore, that the Government will consider Council Tax increases for 2007/08 above 5% to be ‘excessive’. Assuming the Council would wish to avoid setting a Council Tax that the Government would consider ‘excessive’, the following table identifies the Council Tax income that would be derived from a range of different Council Tax increases:- Percentage Additional Council Council Tax Council Tax Increase Tax per annum Band D Income Band D % £:p £:p £ million Nil Nil 1,151.31 146.138 1% 11.51 1,162.82 147.496 2% 23.03 1,174.34 148.853 3% 34.54 1,185.85 150.210 4% 46.05 1,197.36 151.568 5% 57.57 1,208.88 152.925 Each %age point increase in Council Tax produces an additional £1.357m in Council Tax Income. 11
  12. 12. Maximum Budget Requirement 2007/08 Having regard to all the aforementioned issues, the maximum Budget Requirement for 2007/08 for the current level of Council Tax and what could be considered the maximum level of Council Tax for 2007/08 (i.e. 5% increase), are as follows:- Budget Requirement Calculation Current 5% Increase Council Tax Council Tax £m £m Total Formula Grant 297.184 297.184 Dedicated Schools Grant 262.014 262.014 Collection Fund Deficit 2006/07 -3.714 -3.714 Council Tax Income 146.138 152.925 _______ _______ Budget Requirement – range 701.622 708.409 ======= ======= Financial Forecasts Annexe A to this report is a summary of the Financial Forecasts for 2007/08, 2008/9 and 2009/10 and identifies forecast spending at current levels and known commitments as follows:- 2007/08 2008/09 2009/10 £m £m £m Net Expenditure Forecast 748.732 792.450 814.791 The following are the key issues that have been taken into account in producing these forecasts. Base Assumptions The Financial Forecasts have been prepared on the following base assumptions:- 2007/08 2008/09 2009/10 % % % Pay Awards 3.00 3.00 2.75 Employer’s Superannuation Rate 21.30 22.30 23.30 General Price Inflation 2.00 2.00 2.00 Fuel Inflation 2.00 2.40 10.00 Fuel prices for 3 years were negotiated in 2006/07. 12
  13. 13. In addition to general price inflation, where a specific contract refers to a specific price index, then the best information available has been taken into account. The three most significant variations are as follows:- 2007/08 2008/09 2009/10 % % % Community Care Cost Inflation 3.00 3.00 3.00 Liverpool Direct Contract 5.00 5.00 5.00 Enterprise Liverpool Contract 3.00 3.00 3.00 The following interest rates have provisionally been applied to appropriate estimates. The Treasury Management Strategy will be presented in January 2007. 2007/08 2008/09 2009/10 % % % Short Term Interest Rates 5.00 5.00 5.00 Long Term Interest Rates 5.25 5.25 5.25 Major Developments & Initiatives During the financial planning period under consideration there will be a number of significant services and/or financial implications arsing from the following major developments and initiatives:- Liverpool One development Liverpool Arena & Conference Centre World Discovery Centre/Central Library Building Schools for the Future Waste Disposal Authority waste treatment centres Picton 50m Pool Cruise Liner Terminal St Georges Hall re-opening Alsop Sports Centre Stanley Park & New Anfield development Sefton Parks initiative Potential Housing Stock Transfer The capital financing and revenue consequences as far as they can be reliably estimated have therefore been taken into account in the preparation of the financial forecasts that support this report. In addition, of course the financial forecasts for 2007/08 and 2008/09 provide for the approval allocation made in respect of the 800th Anniversary and Capital of Culture 2008 arrangements. However, given the reliance upon forecasts for grant and sponsorship income that have still to be decided upon or confirmed, it is considered prudent to provide for an uncertainties reserve of £4.4m. 13
  14. 14. Over the years the Council has progressively increased its financial support for “Cultural” activities. By 2008/09 the budget for such activities will be some £20.8m greater than that provided for in 2003/04, of which £6m will be financed by reserves built up over previous years. However, the Council has yet to determine what the legacy budget for cultural activities should be after 2008/09. The financial forecast for 2009/10 currently anticipates that the budget for cultural activities is reduced to its base level of 2003/04 – uplifted for inflation. No account has been taken of the proposed Neighbourhood Agenda as the financial implications are currently assumed to be cost neutral. Key Service Trends In common with the majority of other local authorities, the City Council has consistently faced financial pressures arising from the social care needs of various client groups. The Local Government Association has highlighted to the Government the need for increased funding of £1.2bn for this issue. For the City Council the ‘at risk’ benefits relate specifically to the following client groups. The financial forecasts for the next three financial years therefore anticipate the following client numbers for each of these ‘at risk’ areas:- 2005/06 2006/07 2007/08 2008/09 2009/10 Looked After Children 835 835 845 845 845 - average number £452 £526 £542 £558 £575 - average weekly cost Community Care 256 304 387 387 387 Recipients Residential and Nursing Care – £280 £299 £313 £322 £332 average cost per week Bed and Breakfast – average number of 59 65 55 55 55 families per week It is therefore a key issue for the Council to monitor and manage client numbers to ensure spending is maintained within available resources. The Half Year Financial Review identified budget pressures relating to these issues of £4.759m in the current year unless actions were taken to avoid or offset the forecast overspending. The full year implications, if the trends continue could be in the range of an additional £7m to 12m. The financial forecasts currently assume the lower of this range, as there is little evidence of the executive and management actions or service strategies being developed necessary to address the problem. 14
  15. 15. The Council has a range of waste and recycling initiatives to increase the volume and proportion of waste collected that is recycled and reduce the volume and proportion of waste that goes to land fill. The financial forecasts assume the following:- 2006/07 2007/08 2008/09 2009/10 Tonnes Tonnes Tonnes Tonnes Waste recycled 26,833 32,480 41,965 49,562 13% 15% 19% 22% Waste to Landfill 185,456 184,055 178,901 175,721 87% 85% 81% 78% 100 90 80 70 60 Waste to Landfill 50 Recycled Waste 40 30 20 10 0 2006/07 2007/08 2009/10 2009/10 Failure to achieve these tonnage targets for recycling will result in additional costs form the purchase of additional landfill allowance credits. Growth for New Initiatives The financial forecasts provide for £2m of recurring growth for new initiatives in 2007/08 and £3m in each of the future financial years. The adequacy or otherwise of these provisions will be determined by the Budget proposals presented to the City Council on 7th March 2007. Levies The following organisations have a legal authority to determine a levy which the City Council is obliged to take into account when determining its Budget requirements. The major levies notified for 2007/08 and comparisons with 2006/07 are as follows:- Levies Levies Increase Increase 2006/07 2007/08 £m £m £m % Waste Disposal Authority 14.801 17.607 2.806 19.0 Merseytravel 33.124 34.615 1.491 4.5 Environment Agency 0.188 0.209 0.021 18.1 15
  16. 16. In total the levies for 2007/08 will amount to £52.431m which is approximately 7.5% of the Council’s total net expenditure. In addition, there is a levy from the Port Health Authority. For 2007/08 the levy will be £0.162m, which represents a significant increase reflecting the substantial increase in trade through the port and increased requirements from the Department of the Environment. The significant increase in the Waste Disposal Authority levy arises from the assumption that the proposed waste treatment centre initiative secures Government Private Finance Initiative (PFI) funding support. Without the development of the additional waste treatment capacity the Merseyside authorities would be required to purchase additional landfill allowance tax credits for disposal of their waste at approximately £150 per tonne. However, the Government has advised that it may limit an authority’s ability to acquire landfill credits and therefore “force” local authorities to make alternative arrangements. Government approval for the PFI funding is expected in 2007 with the treatment centre itself being developed and financed over the period 2007/08 to 2009/10. All of the Merseyside authorities should be making financial provisions for their contributions. 2006/07 Half Year Financial Review The Half Year Financial Review represents the most recent reported financial position for 2006/07. That review identified that: “Overall anticipated General Fund revenue spending on services was forecast to exceed allocated budgets by £4.759m that, without corrective or offsetting actions, will require the use and reduction of working balances.” The latest forecast is that the budget pressures relating to Children’s Care, Adult and Older People’s Care cost will not be able to be contained within allocated budgets and therefore the Council should now anticipate a reduction in working balances of around £5m. As a result, the balances and reserves at the end of the current financial year that should be relied upon are as follows:- £m Working Balances 3.5 General Fund Reserves 33.5 (excluding School balances) Should however, appropriate executive and management actions be taken to offset and address these continuing budget pressures then £12m of the Budget Gap identified by this report could be avoided. Working Balances The District Auditor, in his Annual Audit & Inspection Letter of January 2006, continued to express concerns relating to the low level of general reserves (balances) and drew the Council’s attention to the position that: 16
  17. 17. “….continuing low level of working balances leaves the Council exposed to the risks of unexpected events and overspends and limits its flexibility to respond to strategic priorities.” When the City Council approved its Budget for 2006/07, it set itself targets for increasing working balances to a level of £10m over the next three financial years. The forecast of balances for 2007/08 was £9m but anticipated available working balances at the end of 2006/07 of £8.5m. In order therefore, to continue to meet the Council’s commitment to its working balances targets as set out below, the financial forecast for 2007/08 now provides for an increase to working balances of £5.5m:- £m 2005/06 Actual 7.0 2006/07 Forecast 3.5 2007/08 9.0 2008/09 10.0 2009/10 11.0 Reserves Based upon an assessment of risk, the financial forecast anticipate increases in the level of reserves of approximately £1.050m each year to ensure that the Council’s Belwin contribution towards the cost of defined emergencies is fully provided for, and that there is a progressive increase in the reserve for the potential claw-back of grant. Additional Reserves have been provided for 2007/08 in respect of: Potential need for a referendum re Elected Mayor £0.5m Continuing Job Evaluation initiative £0.3m Annexe D to this report identifies all the reserves anticipated over the three years and the various movements in each year. Contingent Liabilities Portfolios are currently reviewing their assessments of risks to inform both the Financial Review and Budget processes. Reports on these assessments will be provided in the New Year. However, the Half Year Financial Review identified the following issues which the Council should assess as contingent liabilities. The Council maintains a risk assessment and has identified a number of issues which it would assess as contingent liabilities in that it is unlikely that any financial contribution or reserve would be required during 2006/07. The following are the key issues that have been identified as potential contingent liabilities:- 17
  18. 18. The Council is aware of a significant claim against the Council in respect of compensation claims associated with a major project development within the City. Whilst the Council believes that such claims will not be successful these matters may eventually be determined by the Courts. The Council is also aware that both employees and members of the public are increasingly likely to pursue claims where they believe the Council has been at fault and therefore a liability could arise. There are no major claims from employees or members of the public against the Council at this time. However, under the Equal Pay Act 1970 as modified by the Equal Pay Act (Amendment) Regulations 2003, the Council must complete and implement a local pay review by the 31st March 2007. As a result there is a possibility that compensation claims could be raised in relation to equal pay for work of equal value. The Council is currently conducting a comprehensive job evaluation and harmonisation review which is aimed at resolving these issues. Unlike the majority of local authorities the Council outsourced some years ago those service areas which have attracted major claims in other local authorities. Therefore, there is no reliable estimate at this time of the potential value of any claim arising. The Council has made an assessment of its future liabilities in respect of highways tripping claims and set aside an appropriate level of reserves. However, a significant proportion of the claims will be considered and determined by the courts and therefore there remains uncertainty over the final level of overall settlement. The best estimate is that the reserve may need to be increased by up to a further £2m. The Council has previously entered into guarantee arrangements to enable a number of organisations providing services to the Council to have admitted body status to the Merseyside Local Government Pension Scheme – their employees having been former employees of the City Council. Whilst these agreements are supported by Bonds the valuation of the Pension Fund has been affected by the recent significant falls in the stock market. The majority of these guarantee arrangements have many years to run and therefore subject to future movements and stock market valuations. However, there is one guarantee arrangement to a value of £1.5m that could terminate at the end of March 2007. The Council receives each year over £400m in Government Grant Support to services, projects or initiatives for which the Council acts as the accountable body, either for its own direct expenditure or for the expenditure of other organisations. At the end of 2005/06 the Council has reserves in respect of the potential for grant claw-back should any project or initiative not deliver to its required performance. In addition, the financial forecasts provide for an increase in such reserves of £1m per annum. Whilst the Council has put in place robust project and grant management arrangements, the risk of project failure and grant claw-back exists, although the value cannot be reliably estimated. The council’s annual claim for subsidy in respect of Housing Benefit & Council Tax Benefit is approximately £220m.The 2004/05 subsidy claim was qualified by Audit, as sample testing had indicated that the amount of eligible Rent Allowance and Council Tax Benefit awarded could be overstated by £3.5m. The Council has set aside a £3.5m earmarked reserve to fund any potential subsidy claw-back from the Department for Works and Pensions in relation to this issue. However, the 2004/05 claim has not yet been settled by the Department for Works 18
  19. 19. and Pensions. No provision or reserve was set aside within the 2005/06 accounts to provide for errors in “general eligibility” within the 2005/06 subsidy claim. However, if similar errors are found during the audit of the 2005/06 claim, then a potential claw-back of £3.6m could arise. The Capital of Culture programme being developed is reliant upon significant income from sponsorship of which £5m has still to be secured at the time of preparing these Accounts. However, the Council is likely to be required to commit to performance contracts before the sponsorship is fully secured. Objections to the Accounts for 2004/05 were made to the District Auditor in respect of the Council’s expenditure in respect of its alley-gating initiative incurred during 2004/05. At the time of preparing these Accounts the issue and any future action has still to be determined. Therefore, the cost of any required action can not be reliably estimated at this time although potentially significant. On the 27th September 2006 there was a decision of the High Court that a compulsory purchase order relating to a specific property associated with the Edge Lane area development had been confirmed in error. The judge has recently determined that the ruling should also apply to the whole scheme. There is uncertainty as to the potential financial implications arising from this judgment. Gershon Efficiencies The Government has set each Local Authority a target to achieve efficiencies of 2% per year and produce and publish an Annual Efficiency Statement, by no later than June each year, which sets out how such efficiencies are to be achieved. For Liverpool this equates to a target value of £16.120m of which at least 50% should be by way of efficiencies resulting in cash savings. The remaining target could be by way of increased productivity. The cash related efficiency savings do not have to necessarily reduce the Council’s Budget and Council Tax requirements, but could be re-invested in services. However, a decision to take the full savings effect of £8.6m of cash related efficiencies could significantly contribute to reducing the Budget Gap identified by this report. Government Grants Annexe E to this report identifies the Specific Grants the Council is currently anticipating and in total these amount to £439.257m for 2007/08, £446.057m for 2008/09 and £449.253m for 2009/10. The financial forecasts currently therefore anticipate this level of service grant support. The Government has indicated that the Neighbourhood Renewal Funding grant arrangements will terminate at the end of 2007/08, but are likely to replaced – albeit not at the same level of funding or towards the same outcomes – by some other form of government support. The financial forecasts anticipate therefore continued support towards City Council base current initiatives and costs of £5m per annum. 19
  20. 20. The Government has, however, recently awarded funding towards the Sefton/Liverpool Enterprise Growth Initiative which focuses on the six wards that border the North Liverpool – South Sefton border. The Enterprise Growth initiative will run from January 2007 through to March 2010 and will provide £14.6m of additional resources to the City Council, of which, £12.7m will be revenue and £1.9m will be capital. The financial forecasts currently assume that all of this funding is directed towards the following new outcomes and initiatives:- • To increase entrepreneurial activity amongst the population in the deprived local areas; • To support the sustainable growth and reduce the failure rate of locally owned business in the deprived areas; • To attract appropriate inward investment and franchising into deprived areas, making use of local labour resources; • To contribute to reducing the worklessness rate through the achievement of targets on job creation and self employment. The Council has yet to conclude negotiations with other organisations to agree a Local Area Agreement. However, once agreed then this may result in a number of grants being amalgamated and grant funding to services changed to reflect the new agreed outcomes etc. Capital Funding Strategy The Council’s current Capital Funding Strategy is: • To use capital allocations from Government for those programmes for which the resources have been allocated – housing, transport, education, personal social services. • To use available general capital receipts – estimated at £4.5m per annum for each of the next 3 years – to provide a funding source towards the following programme areas – regeneration and environment, culture & leisure, community safety, ICT and corporate initiatives. • To use ‘right to buy’ capital receipts to fund, housing demolitions, RTB salaries, RTB repairs and housing stock transfer costs. • To maximise the use of external grant funding to support or enhance capital investment. • To utilise unsupported borrowing in respect of specific high priority initiatives such as the Liverpool Arena & Conference Centre and the 50 metre Pool. • To use unsupported borrowing to allow demonstrable ‘invest to save’ initiatives to progress. 20
  21. 21. The Government has yet to provide any notification of its level of supported borrowing towards the City Council’s capital expenditure for 2007/08. However, based upon best information available it is assumed that supported borrowing over the next 3 financial years will be as follows:- 2007/08 2008/09 2009/10 £m £m £m Anticipated Government allocation for supported borrowing 30.372 31.193 32.035 In addition, the Council has approved unsupported borrowing in respect of a number of specific initiatives. The detail of such initiatives and the required phasing for the unsupported borrowing is set out in Annexe F of this report. This Annexe shows that by 2009/10 the Council will have annual revenue financing costs for unsupported borrowing of £7.6m per year that will continue for the next 20 years. The revenue financial forecasts provide for the financing costs for this level of capital borrowing. However, it should be noted that any further unsupported borrowing would need to be met from service Budget allocations. Budget Gap 2007/08 Relating the financial forecasts of net expenditure to the range of estimated Budget Requirement identified above, the Budget Gap for 2007/08 is between £47.1m and £40.3m:- Budget Gap Range 2007/08 No Increase 5% Increase Council Tax Council Tax £m £m Net Expenditure Forecast 748.732 748.732 Maximum Budget Requirement 701.622 708.409 ______ ______ Budget Gap 2006/07 – range 47.110 40.323 ====== ====== However, if the Council intends to set its Net Schools Budget at the level of the Dedicated Schools Grant then the Schools Budget forecast can be reduced by approximately £1.160m. As a result the above Budget Gap can be analysed as follows:- Budget Gap Range 2007/08 No Increase 5% Increase Council Tax Council Tax £m £m Net Schools Budget 1.160 1.160 All Other Services 45.950 39.163 21
  22. 22. Budget Proposals including a Council Tax strategy needs therefore to be considered and determined by the City Council at its Budget meeting on 7th March 2007. Medium Term Financial Plan 2008/09 and 2009/10 The following assessments of Budget Gaps for 2008/09 and 2009/10 are based upon:- • the net expenditure forecasts for the years 2008/09 and 2009/10; • projection of Government grant resources; • current levels of Council Tax income – i.e. before any Council Tax increased strategy is taken into account. 2008/09 2009/10 £m £m Net Expenditure Forecasts 792.450 814.791 Government Grant support: Total Formula Grant -305.208 -313.499 Dedicated Schools Grant -270.134 -278.299 Income from Current Council Tax levels -146.138 -146.138 _______ _______ Forecast Budget Gaps 70.970 76.855 (no increase in Council Tax) ======= ======= Net Schools Budget 1.195 1.230 All Other Services 69.775 75.625 If the Government continues with its capping policies towards Local Authorities and regards annual increases of over 5% as “excessive”, then this effectively represents the maximum level of Council Tax income that the Council can generate over the next three years. Therefore, if increases in Council Tax over the three years 2007/08 to 2009/10 were 5% each year, then this would produce additional Council Tax income in 2008/09 of £14.4m and £21.9m for 2009/10. This would mean that the forecast Budget Gaps (relating to all other services) would then be as follows:- 2008/09 2009/10 £m £m Forecast Budget Gaps 55.342 53.709 (5% increases in Council Tax each year) 22
  23. 23. Even therefore if the City Council chose to increase its Council Tax by 5% each year these forecast Budget Gaps will be extremely challenging to address. The Council now needs to develop financial strategies and policies which are linked to its key strategic objectives and take into account both local improvement priorities and national priorities. During 2006 the City Council reviewed and approved its Statement of Vision, Aims and Priorities. This Statement is set out as Annexe A to this report. This Statement should therefore be the basis for service and financial planning and Budget proposals should be consistent with these stated Priorities, or the Priorities themselves amended. How the Council has regard to its stated priorities will be a key determination of the Council’s Comprehensive Performance Assessment (CPA) for 2007. This issue has consistently been raised by officers and the District Auditor in recent years. Indeed the Council will be unable to improve its CPA rating until this weakness in its arrangements has been positively addressed. Value for Money (VFM) It is best practice for Local Authorities when setting its Budget to be aware and have regard to information on comparative costs and the quality of services provided. Members should then use this information to review and challenge value for money throughout services and corporately, including where appropriate, establish arrangements to consider best value or value for money reviews during the forthcoming financial planning period. To assess the City Council is continuing to improve its overall Value for Money assessment in comparison with other local authorities, requires the Government to release the 2005/06 performance data for all local authorities. However, this data is not now expected to be made available until late December 2006 or early January 2007 and is therefore expected to report on this issue as part of the Q3 Financial Review. However, it is possible to compare overall performance of the Council with the index of the Council’s own Council Tax. This comparison demonstrates that the Council has continued to improve VFM of its services upto and including the current financial year. 23
  24. 24. 140 130 120 Index of Council Tax 110 Index of Performance 100 90 Index of Performance 2003/04 Index of Council Tax 2004/05 2005/06 2006/07 Precepts Whilst the precepts from the Merseyside Police Authority and the Merseyside Fire & Rescue Service have no impact on the City Council’s own Budget or Council Tax, they are included as part of the overall Council Tax bill payable by council tax payers in Liverpool. The two precepting authorities have until the 28th February 2007 to determine their precepts for the financial year 2007/08. Responsibilities of the Chief Financial Officer Under Part 2 of the Local Government Act 2003, the Chief Finance Officer of an Authority is now required to report on the following matters: a. the robustness of the estimates made for the purposes of determining its Budget Requirement for the forthcoming year; b. the adequacy of the proposed financial reserves. There is a requirement for the Authority to have regard to the report of the Chief Finance Officer when making decisions on its Budget Requirement and level of financial reserves. In addition, under the Prudential Code framework the Chief Finance Officer of an Authority is required to prepare and report upon a series of Prudential and Affordability indicators. These arise from capital and revenue Budget proposals which the Authority is then required to have consideration to when making decisions as to their future capital investment expenditure. In Liverpool the Chief Finance Officer is the Executive Director for Finance & Legal Services - Phil Halsall. For the purposes of the Local Government Act 2003 the “financial reserves” of the City Council would incorporate Earmarked Reserves and Working Balances. 24
  25. 25. There is also a requirement upon the Chief Finance Officer of an Authority to prepare a Treasury Management Policy Strategy Statement in accordance with the CIPFA Code of Practice on Treasury Management in Local Authorities. This Policy will be available for consideration in January 2007. To fully satisfy the Chief Finance Officer in respect of the robustness of estimates, any proposed Budget or amendment should therefore: • Be fully based upon the advice of Service officers (supported by finance officers) – or based upon or supported by information the Chief Finance Officer considers reasonable to accept. • Provide only for Budget proposals that are fully costed to service level and where the implications – both financial and upon service performance – are estimated and identified. • Provide for all known future developments either through direct service Budget allocations or the establishment of specific reserves for such purposes. • Provide for an adequate level of Balances and Reserves consistent with the requirements of any Regulation that may be earmarked and/or the Authority’s own risk assessment. • Provide for the full revenue implications of the Capital Programme. • Establish clear targets for income collection in respect of key income streams. • Ensure there are no unidentified savings targets. • Where appropriate ensure that the consequences of current over and under spendings have been taken into account. In addition, the Chief Finance Officer is required to report if, in his view, the level of balances and reserves are likely to inadequate. Therefore, any proposed Budget or amendment should provide for an adequate level of reserves based upon the advice of Officers and having regard to an Authority’s own risk assessment. As identified above in this report, the financial forecasts for the next three financial years provide for the following levels of working balances – this would be the minimum level to satisfy the Chief Finance Officer. £ million 2007/08 9.0 2008/09 10.0 2009/10 11.0 25
  26. 26. ABBREVIATIONS CIPFA ~ Chartered Institute of Public Finance & Accountancy CPA ~ Comprehensive Performance Assessment KLOE ~ Key Lines of Enquiry LSC ~ Learning & Skills Council DfES ~ Department of Further Education Services DSG ~ Dedicated Schools Grant ICT ~ Information Communications & Technology LSC ~ Learning & Skills Council RTB ~ Right to Buy VFM ~ Value for Money Background papers • City Council Budget Decision 8th March 2006 • Statement of Accounts 2005/06 • Half Financial Review 2006/07 – FMS/34/06 26