MFCDA BUDGET AND FINANCIAL PLAN 2006/ /2011

Transcription

1 REPORT TO: AGENDA ITEM: MERSEYSIDE FIRE & RESCUE AUTHORITY DATE: 28 th FEBRUARY, 2006 REPORT NO. REPORTING OFFICER: CFO/48/06 EXECUTIVE DIRECTOR OF FINANCE, ICT AND PROCUREMENT CONTACT OFFICER: MR. KIERAN TIMMINS, EXT OFFICERS CONSULTED: ELT MFCDA BUDGET AND FINANCIAL PLAN 2006/ /2011

2 Purpose of Report To present information to allow members to set a medium term financial plan both capital and revenue that allocates resources in line with the Authority s strategic aims. This wil also wil alow the Authority to determine a budget for 2006/2007 and a precept level in line with statutory requirements. Recommendation Members consider this report and:- a) Confirm their strategy on balances and the level of balances and reserves they consider appropriate for the forthcoming and future financial years. b) Decide the level of precept they wish to set for 2006/2007 and any strategy for precepts they wish to adopt for future years c) Choose the growth and savings options (if any) they wish to support d) Confirm the capital strategy investment strategy they wish to adopt for 2006/2007 and future years. e) Note the prudential indicators relating to the proposed capital programme and agree the Treasury management indicators set out in the Treasury Management Strategy for i. External Debt ii. Operational Boundary for Debt iii. Upper limits on fixed interest rate exposure iv. Upper limits on variable rate exposure v. Limits on the maturity structure of debt vi. Limits on investments for more than 364 days 2

3 Information The Authority is required to determine its budget and precept level for 2006/2007 by 1 March In previous years the Authority received information relating to the budget as a number of discrete reports :- Forecast Estimates Capital Programme Savings and Growth Options Treasury Management Strategy In the same way as last year, this year in order to:- a) respond to the introduction of new capital borrowing freedoms b) reflect best practice c) provide value for money d) focus on the link between capital investment decisions and revenue budgets e) assist members to continue developing their strategic financial planning all financial information will be presented in a single report. The following structure will be adopted:- Section Focus Page A Executive Summary 4-10 B Background Information C Five Year Capital Programme D Prudential Indicators E Treasury Management Strategy F Revenue Forecasts 2006/ / G Options for Delivering a Balanced Plan H Adequacy of Reserves and Balances

4 A) EXECUTIVE SUMMARY The Authority must set a balanced budget and a precept level by 1 March The budget and financial plan should allocate resources in line with corporate priorities. The key aims of Merseyside Fire and Civil Defence Authority are set out in its Integrated Risk Management Plan and may be summarised as Making Merseyside a safer,stronger community by working in partnership to provide an excellent, affordable service which will: Reduce risk through the community by protective community safety services Respond quickly to emergencies with skilful staff Restore and maintain quality of life in our communities Revenue Forecasts A five year financial revenue estimate has been prepared based upon the assumptions set out in the report. This is set out below. MFRA BUDGET and Five Year Financial Plan Expenditure 2006/ / / / /2011 'm 'm 'm 'm 'm Revised Base Budget Replenish reserves INFLATION Pensions Funding Changes Remove Pensions Costs In Base Add back employer on-cost Add Back Injury pensions Ill Healths 2005/ Ill healths 2006/07& onward Impact of Capital Programme New Growth Nil Nil Nil Nil Nil PFI Rentals Less Savings TOTAL EXPENDITURE Income Government Support(RSG & NNDR) Precept Income Taxbase increase Precept Increase at 4% Collection Fund TOTAL INCOME DEFICT TO BE Gap BRIDGED to be funded by further Savings

5 This forecast identifies a deficit for 2006/2007 of 8.499m. If this deficit were to be covered by precept increases alone this would require a precept increase in excess of 40%. This has arisen because of :- Exceptional pensions expenditure in 2005/06 depleting reserves The Authority hoped that new funding arrangements for firefighters pensions would eliminate the pensions problem altogether by returning expenditure to an average position. In fact the proposals, whilst stopping the problem getting any worse maintain the net revenue position at the exceptional 2005/06 position. Therefore the Authority needs to repeat the one-off savings used to support the 2005/06 position. The significant imbalance between inflation and grant increases. Of this problem approximately 2.5m might be regarded as one-off expenditure and the remaining 6m is a refelction of an underlying imbalance between Income and Expenditure levels. It should be noted that the Authority s revenue Support Grant is now entirely awarded on the basis of population topped up for by a number of relative risk factors. It is clear that the Authority s overal spending levels are considerably higher than its grant income and capacity to generate income from council tax.in very crude terms the Authority has compared to its grant income, relatively, too many wholetime firefighter posts given its overall population and the level of risks facing the community of Merseyside. Whilst it can lobby the Government to change the formula for grant and/or provide additional resources, the prospects for a significant improvement in cash terms is not considered good. The Authority must therefore take action to address its underlying cost base in the medium term as part of the financial strategy it adopts. 5

6 Reserves and Balances As a result of exceptional pensions expenditure in 2005/06 the reserves of the Authority are forecast to be almost completely eroded. In the light of the financial risks facing the Authority the Executive Director of Finance recommends that the Authority should aim to replenish reserves to the levels set out in the table below as part of its financial plans Forecast Revenue Reserves as at 31 March 2007 million General Revenue Reserve or Working Balance Pensions - Earmarked Reserves Bellwin Emergency Insurance-Uninsured Risks Emergency Planning Total-All Reserves

7 Options for Bridging the Gap Savings and Growth options Officers have developed a range of savings options for members to allow them to set a budget at a variety of different levels. These are set out in detail in Appendix 5 and summarised in the table below:- SAVINGS AND GROWTH OPTIONS Value Future Yrs Number Description 2005/ / / / / /11 'm 'm 'm 'm 'm 'm ON E-OFF SAVIN GS OPTIONS S1 Capitalise exceptional pensions expenditure in 2005/ S2 Change policy on smoke alarms accounting S3 S4 Change policy on accounting for smoke alarm installation Accept results of telephone survey and Assume that pensions defict will not be 'worst possible' scenario TOTAL IMPACT OF ONE-OFF MEASURES PERM ANENT SAVINGS OPTION S S5 Dynamic Staff Management savings target S6 Efficiency Savings Target - Non Pay S7 ICT Saving target - Work Jointly with Telent to delliver savings of 3-5% per annum in ICT budget TOTAL IMPACT OF ONGOING SAVINGS MEASURES TOTAL SAVINGS OPTIONS IDENTIIED GROWTH RECCOM EN DATION S G1 Work with Youth through Volunteers TOTAL FURTHER GROWTH Members should bear in mind that reserves and balances and one-off savings should only be used to finance one-off expenditure. If such monies are used to fund ongoing revenue expenditure without taking action to reduce underlying expenditure, the Authority would find itself facing the same deficit in the next and future years but without reserves available to finance it. This is underlined by the District Auditor s Golden Rule - that one of revenue reserves should not be used to support ongoing revenue expenditure. The biggest single option is the application to central government to capitalise pensions expenditure. This is in line with the financial strategy agreed in last years budget for coping with such problems. At the time of writing no decision has yet been received from the ODPM on this application. 7

8 Growth Options Officers have received significant bids for new growth from budget managers and there is a need to invest to deliver the IRMP but it is considered that this total new growth can be contained within current budgets by efficiency. One additional growth item has been identified that members may wish to support m p.a. to work with the voluntary sector in delivering community safety amongst young people. Council Tax Increase The forecast produced already assumes a 4% precept increase in line with Authority plans. The Authority may choose to use a further precept increase to bridge the gap. However the Government has repeatedly said :- We expect al local authorities to budget prudently and that the average Council Tax increase in England wil be less than 5% next year. It is clear that authorities setting high Council Taxes might well face capping. The Government has used its powers in recent years and capped a number The ready reckoners below show the impact of potential Council Tax increases. Council Tax Increase 1% 4% 5% 10% 37.3% Band D Council Tax Increase ( ) Extra Income Total ' ,142 2,283 8,516 Impact on District Precepts '000 LIVERPOOL ,588.3 WIRRAL ,105.4 ST.HELENS ,104.4 SEFTON ,874.7 KNOWSLEY , , ,516.3 Members must choose a portfolio of savings and growth options, a strategy for reserves (in the light of the advice of the Director of Finance) and a Council Tax level for 2006/2007 that sets a balanced budget in line with the statutory timetable. 8

9 Capital A capital programme has been prepared which is summarised below Five Year Capital Programme Summary: 2006/ /11 Type of Expenditure Total Cost 2006/ / / / /11 Vehicle Replacement 7,510,000 1,860,000 2,106,000 1,176,000 1,145,000 1,223,000 City Centre Fire Station 2,500,000 2,500, Building Programme 6,354,000 3,554,000 1,293, , , ,000 Operational Equipment 758, , ,600 49,600 49,600 44,600 Hydrants 175,000 35,000 35,000 35,000 35,000 35,000 Information Technology 1,315, , , , ,000 90,000 Knowledge Management 250,000 50, , , Financial Systems 57,000 57, Replacement of Domestic Appliances 41,000 31,000 10, Training & Development Academy 235, ,000 14,000 74, Community Fire Safety 2,173, , , , , ,000 Fire World 7,035, ,560,000 3,475,000 0 Furniture 35,000 35, TOTAL 28,439,400 9,911,000 4,311,600 6,245,600 5,943,600 2,027,600 includes slippage amount of: 5,154,000 Financing Available Capital Receipts Derby Road ,000, City Centre Fire Station -2,500,000 - Toxteth fire station - contribution from Liverpool -250,000 Fire World contributions -3,060,000-2,975,000 - R.C.C.O. -131, Capital Grant (Smoke Alarms) -169, , ,800, ,000-4,060,000-2,975,000 0 Borrowing Requirement 7,111,000 3,723,600 2,185,600 2,968,600 2,027,600 Compared to Supported Borrowing Amount 2,662,000 2,662,000 2,728,000 2,797,000 2,867,000 9

10 This capital programme has a borrowing requirement of 7.111m in 2006/ The programme does propose significant prudential borrowing for the first time. The total of unsupported/prudential borrowing is 5.5million across the life of the programme. The revenue impact of this is forecast to be million. If Members approve all the options relating to capitalisation put forward option this will increase the borrowing totals significantly by a further 9.0 million. Whilst this is a big increase in debt levels, debt servicing costs will still make up a relatively smal portion of the Authority s overal costs. This is considered affordable, prudent and sustainable in the light of the prudential indicators calculated for the Authority as long as such a decision is combined with action to tackle the underlying budgetary deficit Treasury Management The Prudential Code requires the Authority to set a number of Indicators, certain of which replace the borrowing/variable interest limits previously determined as part of the Treasury Management strategy statement. In the light of these issues and views taken on interest rates a strategy has been prepared that sets limits for the next three years on:- Overall Level of External Debt Operational Boundary for Debt Upper limits on fixed interest rate exposure Upper limits on variable rate exposure Limits on the maturity structure of debt Limits on investments for more than 364 days The strategy is set out in detail in the report. 10

11 B) BACKGROUND INFORMATION This section provides general financial information on Authority finances and the financial health of the Fire Authority. Corporate Strategy If any organisation wants to be successful, its budget setting and medium term financial plan need to reflect the allocation of resources to support the key strategic aims and priorities. For the last three years members have maintained a comprehensive five year financial plan and capital programme for the Authority. This report will build upon this strategic approach to financial matters. Members will recognise that this report is prepared at a time when the fire service faces a period of tremendous change and challenge. A number of key issues will need to be addressed as part of any financial strategy and in particular cater for the modernisation of the fire service and the Integrated Risk Management Plan (IRMP). The final IRMP (available on the website was published on 25 March The plan reiterates the main strategic themes that the Authority has been progressing and acknowledges that the Authority has been driving forward the modernising agenda for a number of years now. That IRMP has now been updated by the action plans for 2004/05, 2005/06 and the latest (year 3) action plan which was agreed by the Authority on the 9 th February (CFO/30/06). The IRMP is the key driver in the alocation of the Authority s resources in response to the risks facing Merseyside The Authority s key visions and aims as setout in the IRMP are shown in the table overleaf. Any financial plan should aim to allocate resources to deliver these key aims. 11

12 The Vision Statement Making Merseyside a safer,stronger community Our Mission To work in partnership to provide an excellent, affordable service which will: Reduce risk through the community by protective community safety services Respond quickly to emergencies with skilful staff Restore and maintain quality of life in our communities Corporate Aims 2006/07 Reduce Risk We will reduce the risk of fire and other emergencies in all communities of Merseyside through a combination of prevention and protection, working in partnership with other service providers. Respond We will respond to all emergency calls for assistance with a level of response appropriate to the risk and deal with all emergencies efficiently and effectively. Restore We will work with partners to help individuals, businesses and communities recover from the impact of emergencies and help the return to normality. Organisation We will operate efficient and effective organisational functions that will support the core functions of the Authority in a way that provides value for money for the communities of Merseyside. These are not new aims for Merseyside. The Authority has moved well in advance of central direction and has had a very similar strategy for several years now based upon focussing resources on community fire safety. Is the Strategy Working? Significant evidence is emerging that the Merseyside strategy is beginning to deliver positive results. Merseyside is significantly outperforming its peer Authorities in reducing deaths and injuries from fire. For example Merseyside has :- Conducted 255,567 HFSCs (Home Fire Safety Checks) Fitted more than 300,000 free smoke alarms Cut fire deaths by 27% since 2000/01 Reduced fire injuries by 57% since 200/01 12

13 Brought the cost of fire to the local community down by 26% from 55.4 million in 1999 to 40 million. The estimate for 2005 is 40.9 million. Invested in the prevention of firework incidents to build upon the 70% reduction in nuisance incidents around bonfire night. Reduced malicious false alarms by 50% since 2000/01. Reduced antisocial behaviour vehicle fires by 35% since 2000/01. Reduced dwelling fires by 30% since 2000/01. The Authority has achieved Beacon Council Status for its work with older people. The Authority was considered Excellent in the recent Comprehensive Performance Assessment. Financial Strategy and where are we now? In recent years the Authority has adopted a financial strategy that Sought to minimise Council Tax increases with a target increase of less than 4% that it has adhered to. Recruited to full uniformed establishment less staff reductions and budgeted for staff actually in post. Sought to generate significant savings through staff reductions. Made significant investment in Community Fire Safety. Made significant investment in IT and computing (including outsourcing). Provided further investment in equality and health and safety. Attempted to make prudent provision for the cost of future pension lump sum payments. Maintained a revenue reserve in excess of 1.4m and usually 2m following assessments of risk. Because of pressures on revenue budget generally avoided funding capital expenditure from revenue through leasing, RCCO or PFI (with some exceptions) Invested in a new HQ building 13

14 These strategies have allowed the Authority to make significant strides in reducing cost and maintaining relatively low levels of Council Tax increase despite very tight grant settlements. The Authority is below the national average council tax for fire services. FIRE COUNCIL TAX 2005/ In 1996/97 Merseyside Fire & Civil Defence Authority Council Tax was more than 50% above the average of Metropolitan Fire Authorities. Since then we have increased Council Tax 80%. Metropolitan Fire Authorities average increase is over 139%. Total Cumulative Increase in Council Tax 1995/96 to 2005/ % Ave rage Met Fire Me rseyside Fire 14

15 However despite the recent improvements we remain, in comparison to our peers, a high spending authority that spends well above FSS (the government grant calculation of our need to spend) as the table below illustrates. However it is noted that on other measures e.g. expenditure per incident Merseyside fares better in comparison Expenditure per 1,000 Population 50,000 45,000 40,000 35,000 30,000 25,000 Greater Manches ter So uth Yorkshire Tyne &Wear West Midland s West Yo rkshire Average of Mets Merseysid e Natio nal Average Expenditure per Incident 2,500 2,000 1,500 1,000 Greater Manchester South Yorkshire Tyne &Wear West Midlands West Yorkshire Average of Mets Merseyside National Average This is mainly because of :- a) inherited infrastructure and associated firefighter staffing establishments. Merseyside was, until very recently, the only whole time staffed service outside London, and b) significant investment in the modernisation agenda and community fire safety in recent years. Merseyside continues to invest significantly more money in community fire safety than other fire services. 15

16 Analysis of Community Fire Safety Expenditure Per Metropolitan F&CDA's ( 's) Greater Manchester SouthYorkshire Tyne &Wear West Midlands West Yorkshire Average of Mets (excmside) Mer seyside National Aver age Expenditure Per 1,000 Population The improvements in Council Tax level has been achieved when the Authority s grant increases have been at the floor (minimum) increase levels of less than 3.5% for several years whilst firefighters pay awards have been very much higher. Pay versus Grant Increases since Cumulative % Firefighter Pay increases Grant increases / / / / / /06 Year 16

17 Overall Financial Health The overall financial position of the Authority appears relatively good on the basis of the following key indicators:- Excellence in CPA Authority accounts 2004/2005 audited without qualification again. Annual Audit letter highlighted general satisfaction with financial corporate governance and reporting arrangements. IRMP Recognised as innovative The Authority has maintained a general revenue reserve of over 2.0m in recent years Cost centre budgeting now well established Have maintained a five year financial plan and capital programme and most importantly a consistent medium term strategy The authority has delivered huge savings However it should also be recognised that :- a) The Authority is forecast to overspend significantly on pensions in 2005/06. Whilst not entirely unanticipated this will impact on reserves. This is discussed in more detail later in the report. b) The current proposals for central government grant allocations and the capping regime set by the Secretary of State imply that Merseyside is currently too expensive a service given its population and risk factors. This means that there is a significant underlying budget gap between expenditure and income. 17

18 Current Allocation of Resources Members will be aware that Fire Service expenditure is predominantly employee/pensioner based (83%) as is shown in the pie chart below Fire Service Expenditure 2005/06 Other 17% Pensions 19% Employees 64% Employees Pensions Other In fact when the new arrangements for funding firefighters pensions are introduced in 2006/2007 the position will become Fire Service Expenditure 2006/07 Other 19% Pensions 0% Employees Pensions Other Employees 81% A full subjective analysis of the budget is set out in appendix 1 18

19 Allocation of Resources in line with Corporate Objectives The Authority has an excellent track record of investing in line with its corporate priorities and this was reflected in the CPA scoring process. Within the base budget the following investments are included :- Reducing Risk Employment of over 30 specialist Advocates ( 0.6m) Purchase of 0.5m worth of smoke alarms. Continuation of the Princes Trust and Free Programmes ( 0.3m). Investment in Fireworks Team (FIRST) ( 0.1m) Investment in District Fire Safety Teams over 3.6m. Fire Service Direct ( 0.2m) Working with young people, including school liaison. Invested in Volunteers with the Fire Support Network ( 0.1m) Responding Spends 30m on service delivery and emergency response through its 26 fire stations (these staff do increasing amounts of preventative work as well). Spends in excess of 0.3m on its Search and Rescue Team. Invests 0.1m p.a. on its first small fires unit, targeting antisocial fires. Invests 0.4m on the Incident Management Team. Budgeted 3.7m for the Resilience and Reinforcement Team. Developed the unique quick response motorcycle unit. Invests in Merseyside s Inshore Rescue Team ( 0.3m p.a.) Operating the brand new Command and Control system ( 2m) Organisation Fleet Management and maintenance of high quality specialist vehicles ( 1.2m). Investing in ICT, which is increasingly important to a risk based modern service ( 3m). Training and Development of staff to have a well skilled workforce including the Academy at Croxteth ( 2.3m). Equality and Diversity ( 0.2m) Health and Safety ( 0.2m) Professional joint procurement function with Lancashire Fire Service ( 0.4m). 19

20 C) Capital Programme Capital is considered first in this report so that members can clearly consider the revenue impacts of capital investment and borrowing decisions as part of revenue budget and Council Tax considerations. [It is important to note that this section does not anticipate any capitalising of expenditure as part of a medium term financial strategy. The Authority has options which might increase the Capital Programme by a further 9m if agreed]. Introduction The Government in consultation with the Chartered Institute of Public Finance (CIPFA) has, over the last few years, been reviewing the capital control system of local government, with a view to improve accountability and freedoms for local authorities in respect of capital investments. In effect, it has been seeking to alow business based decisions whilst retaining overal control of public spending. From 1 st April 2004, the Local Government Act 2003 replaced the existing regime of capital controls, as set out in Part IV of the Local Government and Housing Act 1989, with the Prudential System of Capital Finance. Under the previous system of capital controls local authorities were only permitted to finance capital expenditure from borrowing within limits set by the Government (Credit Approvals). The new arrangements enable local authorities to decide for themselves how much they can afford to borrow for capital purposes, subject to various safeguards. Last year Merseyside did not use these powers. The Government has however taken reserve powers to limitan authority s borrowing if the Government believes it to be unaffordable, or in times of public spending restraint. Prudential Code A key part of the new capital system is the CIPFA Prudential Code for Local Authority Capital Finance which provides a framework of decision-making under which authorities will decide their capital investment and financing plans and set limits for borrowing. Authorities wil be required to have regard to the Prudential Code when setting their future budgets and Council Tax levels - which in practice means that they would need to have very good reasons not to comply. The over-riding objective of the Prudential Code is to ensure that the capital investment plans of local authorities are affordable, prudent, sustainable, and follow good practice. 20

21 Some of the main features of the Prudential Code are as follows: The full Authority must consider and set a number of indicators and limits for its capital plans as part of the annual budget setting process. The limits can be revised during the year but only by the full Authority. The mandatory indicators are shown in section D. The indicators and limits must be monitored during the year and outturn figures reported. The Authority must produce and maintain capital and revenue plans for at least three future years including three year estimates of its future Council Tax taking account of the proposed capital programme and other plans. The Authority must set an authorised limit for its total debt (including borrowing and long term liabilities) which may not be exceeded. Limits relating to treasury management matters must be considered as part of the annual Treasury Management Strategy report. Fundamentaly, the objective of the Code is that the total of an authority s capital investment remains within sustainable limits, following consideration of the impact on the botom line Council Tax. This is ultimately determined by a judgement about what Members consider is an acceptable level of Council Tax. Capital Investment Strategy. Each financial year the Authority produces a capital programme to manage major capital schemes. Owing to the nature of capital expenditure a large number of schemes span more than one financial year so the programme is a rolling programme covering five financial years. The starting point for this programme has been an assessment of the capital spending requirements for the Authority for future years based upon needs identified by the various expert professionals in areas like buildings, vehicles, ICT, and operational equipment. Initial bids were requested and through an iterative process officers have modified the programme in the light of a) service requirements, and in particular investments required to support and deliver the IRMP. b) the need to adopt a prudential approach to capital borrowing under the new regime, being mindful of affordability, prudence and sustainability and in particular the impact on Council Tax levels. This has produced a total five-year capital programme proposal of m with a 2006/2007 programme of 9.911m which is set out in the summary table below. This table also identifies funding of the programme and hence the borrowing requirements to support that capital programme. The full programme is set out in Appendix 2. 21

22 Five Year Capital Programme Summary: 2006/ /11 Type of Expenditure Total Cost 2006/ / / / /11 Vehicle Replacement 7,510,000 1,860,000 2,106,000 1,176,000 1,145,000 1,223,000 City Centre Fire Station 2,500,000 2,500, Building Programme 6,354,000 3,554,000 1,293, , , ,000 Operational Equipment 758, , ,600 49,600 49,600 44,600 Hydrants 175,000 35,000 35,000 35,000 35,000 35,000 Information Technology 1,315, , , , ,000 90,000 Knowledge Management 250,000 50, , , Financial Systems 57,000 57, Replacement of Domestic Appliances 41,000 31,000 10, Training & Development Academy 235, ,000 14,000 74, Community Fire Safety 2,173, , , , , ,000 Fire World 7,035, ,560,000 3,475,000 0 Furniture 35,000 35, TOTAL 28,439,400 9,911,000 4,311,600 6,245,600 5,943,600 2,027,600 includes slippage amount of: 5,154,000 Financing Available Capital Receipts Derby Road ,000, City Centre Fire Station -2,500,000 - Toxteth fire station - contribution from Liverpool -250,000 Fire World contributions -3,060,000-2,975,000 - R.C.C.O. -131, Capital Grant (Smoke Alarms) -169, , ,800, ,000-4,060,000-2,975,000 0 Borrowing Requirement 7,111,000 3,723,600 2,185,600 2,968,600 2,027,600 Compared to Supported Borrowing Amount 2,662,000 2,662,000 2,728,000 2,797,000 2,867,000 22

23 The key assumptions underpinning the capital programme are:- a) Vehicle Investment Strategy (Total 7.5m) The Fleet Manager has identified needs as follows:- An Ageing Fleet Significant provision for new appliances has been included in the capital programme up to 6 appliances per year to ensure that the fleet is modern and efficient. These purchases will also help introduce the rescue pump/support pump concept - see below for details. The Authority under invested for many years in this area. A Need for Specialist Vehicles There is a need to make provision for the purchase of specialist vehicles to support the IRMP. - Hose Layers to support the water strategy - Further Small Fires Units - Another Rapid Response Motorbike (IRMP 2.10) - Incident Management Units - A combination appliance (IRMP 2.25) - Vehicles to provide recovery assistance to firefighters - A crane In addition, there is a need for investment in renewing the fleet of specialist vehicles, particularly aerial appliances and prime movers, to support the wider range of roles for the fire service including rescue. Ancillary Vehicles Provision is included for the phased renewal of the ancillary vehicle fleet. These are increasingly important to support CFS work (see also CFS section below). b) Building Investment Strategy (Total 3.5m) Members will recall that, as detailed in a number of reports and presentations over recent years, it has been identified that over a significant period of time the investment by the Authority in its building stock has been inadequate and insufficient to allow adaptation of the assets to meet the needs of a changing fire service. Fire Stations have been identified as:- poorly located in relation to the communities they serve often in oversized inefficient buildings in buildings which are inadequate for the demands of modern fire service vehicles and equipment in buildings which have been inadequately maintained 23

24 poorly located in relation to Merseyside s curent risks as identified in the IRMP uninviting to the community and providing unpleasant work environments for Fire Authority staff lacking the provision of the sort of facilities expected to meet the demands of a diverse community and workforce. This has been summarised in our Asset Management Plan. It has been recognised that in order to address these issues a significant capital investment is required. PFI In order to address the investment required, Officers submitted a successful bid under the latest round of PFI for the Fire Service. The Government has approved a joint project (with Merseyside leading), between Merseyside, Lancashire and Cumbria. The project will deliver 15 new fire stations and 6 major refurbishments. In Merseyside there will be new fire stations at Birkenhead, Kirkdale, Southport, Newton-le-Willows (2 at new sites) and major refurbishments at Allerton, Belle Vale, Bromborough, Bootle, Formby and St. Helens. The total investment in North West building stock will be 35m and in Merseyside 16.4m. Since this is of balance sheet investment, it is not reflected in this capital programme apart from monies to support the acquisition of sites. Buying sites and providing them to the project with planning permission reduces risks for developers and hence costs. Non PFI Project Assets For those properties which don t form part of the PFI project investment is proposed in line with the Asset Management Plan. Notably :- - Refurbishing fire stations 2.8m - Refurbishing and re-roofing vehicle workshops 0.9m - Accommodation for Marine Rescue Staff (IRMP 2.12) 0.4m - Community Facility Initiatives 0.3m - Developing our pilot LLAR station at Heswall 0.4m c) City Centre Fire Station (Forecast value 2.5m) As members are aware, work on the new City Centre fire station has progressed through the year, and is due to be open late Although there is no net cost to the scheme for the Authority, it is shown in the programme with an equivalent figure as income against capital receipts. 24

25 d) Operational Equipment ( 0.8m) Significant provision is also made to ensure that a modern fire and rescue service can be delivered and in particular provision is made for investment specialist rescue equipment and new breathing apparatus. e) Hydrants (Total 0.2m) The regular annual provision is made for installation of new or replacement hydrants in line with our water strategy. f) ICT Investing in line with the IEG Strategy (Total 2m) In line with the Authority's commitment to IEG (Implementing Electronic Government), there is a significant investment in ICT within the programme. The largest single element is the investment in the replacement of existing telephone systems across the Service. ( 0.7m) Significant provision is also made for developing Knowledge Management Systems ( 0.3m) In addition, there is also spending proposed on :- - Updating computer wiring and upgrading control boxes on stations - Handheld radio replacement - Development of the intranet and website - Rolling programme of PC replacement. - New developments for multimedia and computerised HFRAs - Various technology upgrades & developments - Investing in financial systems to e-enable transactions g) Domestic Appliances ( 41,000) Modest expenditure is proposed for investment in replacement fridge/freezers on fire stations. h) Training & Development Academy (Total 0.2m) A range of building improvement works are required to keep the STC up to date and efficient for training purposes. In addition, expenditure is proposed to upgrade the Centre s audio-visual equipment and improve search and rescue training facilities. i) Community Fire Safety (Total 2.2m) A small number of hand held computers are required for Fire Safety Inspectors to help them carry out their legislative and advisory duties more efficiently. 25

26 Smoke alarms and sprinkler systems are being classed as capital expenditure in line with Government guidance. This follows the awarding of capital grants by the ODPM towards the purchase cost of such items in financial years 2004/05 through to 2007/08. These grants are being used to offset this expenditure and the revenue budgets for those years show a saving equivalent to the grants. The policy on accounting for smoke alarm expenditure is under review (see budget options). Fireworld Total provision is made of 7m for developing a world leading community education centre and visitor attraction. It is assumed that the Fire Authority would only have to fund 1m of this with the remainder of the investment provided by partners. Work on feasibility studies is progressing well and will be reported during the year. Funding The Programme Capital Receipts Capital receipts are usually the proceeds from the sale of assets. In future any such receipts can be applied either to reduce an authority s outstanding debt or to be reinvested in the capital infrastructure. The Authority has regularly used capital receipts as a source of funding for new capital investment with little, if any, being used for debt repayment unless regulations require a proportion of the receipts to be used specifically to repay debt. However, under the new regime the Authority needs to consider whether a proportion of any future receipts should now be used for debt repayment, and thereby ensure that the cost of debt financing does not increase for future Council Tax payers. The proposed capital programme anticipates capital receipts from: - City Centre fire station 2.5m (2006/07) MaCC Site at Derby Road 1.0m (2008/09) Under Review It assumes that all these are reinvested in the capital infrastructure. Capital Grants As detailed above, the ODPM has awarded capital grants for smoke alarms and sprinkler systems for the financial years 2005/06 to 2007/08 (as well as the current year). This is shown as one of the financing options together with a revenue contribution (RCCO) of 131,000 in the first two years. This revenue contribution is to cover the cost of smoke alarm purchases not covered by grant in those years. After 2007/08 the capital grants finish and it is assumed at this stage that expenditure will be wholly funded from the capital programme in future years. This policy is under review (see options). 26

27 Partner Contributions Partner contributions (either grant, sponsorship or capital receipts) are anticipated for Fireworld and work at Toxteth fire station. Alternative to Operating Leasing Under the current system of capital controls, investment that was funded by operating lease did not count as either capital expenditure or the financing as a credit arrangement. Therefore, in common with most other local authorities, operating leasing has been a source of funding for some limited eligible assets (e.g. vehicles, plants and machinery, and computer equipment) although the Authority generally avoided this because of the impact on the revenue account. However, whilst operating leasing as a source of funding remains outside of the Prudential capital system, no leasing is assumed in this programme. The Director of Finance will monitor the suitability of alternative methods of finance. Borrowing Under the Prudential capital system Local Authorities are now able to increase their borrowing above the allocation provided by the Government to fund capital investment. However, the Government has retained reserve powers to limit an authority s borowing if the Government believes an authority s proposals to be unafordable or in times of national public spending constraint. The proposed programme represents an overall expenditure increase on the capital programme approved last year of m (2004/ /10) plus the additional new year expenditure of 2.027m in 2010/11. The table below sets out the main changes. 27

28 VARIATIONS IN CAPITAL PROGRAMME FROM THAT AGREED LAST YEAR Expenditure m Financing (other than borrowing) m Hence Additional Borrowing Required m Reduced Fire Station Refurbishment (PFI) (0.4) - (0.4) Land Purchase for PFI Speke Workshops (including roof) Emergency Power Strategy Accommodation for Marine Rescue Building Pilot LLAR station Office Accommodation Strategy Increased Smoke Alarms Fireworld 7.0 (6.0) 1.0 Purchase Boat Other (0.1) (0.2) (0.3) Extra Year Added to Programme (2010/11) TOTAL 12.5 (6.2) 6.3 The total of Authority borrowing now proposed across all seven years (2004/ /11) is m, compared to last year s capital programme of m. An increase of 6.291m of which 2.027m relates to the year 2010/11 (the additional year added to the programme). This level of supported borrowing for the Authority across the seven year period is estimated to be m (assuming supported borrowing continues at 2.662m per annum plus inflation and allows for borrowing allowances not utilised in previous years). The level of prudential unsupported borowing is therefore :- m Total borrowing in programme Supported Borrowing Estimate Total Prudential Borowing 5.529m 28

29 In addition, Members will note that the medium term financial strategy assumes that the Secretary of State will allow the Authority to capitalise some expenditure. At this stage, any further capitalisation is not included in these totals. Impacts on Revenue Budget and Financial Plan When the Authority borrows money, it has to factor the debt repayment costs into its financial plans. The revenue cost of the proposed capital programme has been calculated and the variations included in the 5 year financial plan. The overall impact on the financial plan is :- 2006/7 2007/8 2008/9 2009/ /11 m m m m m Variation to borrowing cost Despite the proposed additional borrowing, the impact on the financial plan is relatively small because of :- (a) (b) (c) Revised timings of borrowings. Movements in interest rate assumptions. Prudent original assumptions. To give Members an indication of the impact of the proposals in isolation, rather than the marginal impact on the financial plan, the following table has been prepared :- If borrowing was restricted to the level of supported borrowing If borrowing restricted to previous Capital Programme levels Reduction in borrowing 5.529m 4.264m Reduction in Debt Repayment costs 0.473m 0.365m Council Tax equivalent 2.1% or % or 86p More information on the impact on the Capital Programme is shown in the section on Prudential Indicators (D). Possible Further Prudential Borrowing Members will note that the key element of the financial strategy is capitalisation of pensions and other options consider further capitalisations which are not included in the figures above :- 29

30 The table below gives a guide to the impact of each extra 1m of borrowing, and of the total capitalisation process. Additional capitalisation can only be funded by additional borrowing. Extra Borrowing 1m 9.5m Borrowing Cost P.A m 0.812m Council Tax Equivalent 0.4% or 20p 3.6% or

31 D) Prudential Indicator Report Having formulated a draft Capital Programme, the Authority, in making final decisions upon that Capital Programme and Revenue Budget 2006/07, will need to consider a report setting out a range of Prudential Indicators aimed at demonstrating the intended Investment Programme s afordability, prudence and impact upon Treasury Management activity and strategy. It should be noted, however, that in order to provide those Indicators, both Capital and Revenue financial plans need to be prepared for each of the next 3 financial years, commencing with 2006/07. The financial plans prepared in respect of the financial years 2007/08 and 2008/09 are not to be mistaken for approved Budgets. They are, at this stage, only a guide for financial planning and as such subject to significant change as a result of decisions made by the Authority. However, such plans are required to be supported by an indication of future Council Tax. At this stage an assumption of Council Tax increases of 4% in all years has been made. IT SHOULD BE NOTED THAT THE FIGURES PRODUCED HERE DO NOT TAKE ACCOUNT OF ANY DECISION ABOUT FURTHER CAPITALISATION MADE TO BALANCE THE BUDGET. ATTEMPTS WILL BE MADE TO SHOW THE IMPACT OF A 1M CAPITLISATION AS A GUIDE TO MEMBERS. Prudential Indicators The Authority must demonstrate that its spending plans comply with the Prudential Code by the publication of a number of performance indicators, which are known as the Prudential Indicators. Details of the prudential indicators for this Authority are provided below. The purpose of the indicators is to demonstrate that capital investment remains within sustainable limits and that the Authority has considered the impact of the whole plan on future levels of Council Tax. The indicators that will measure this are :- Estimates of the ratio of capital financing charges to the net revenue budget Estimates of the precept that would result from the three-year capital plan. Estimates of the capital financing requirement. Decision Making on Capital Investment A fundamental principle of the code is that the capital programme must be driven by the desire to provide high quality value-for-money services. As a consequence the code explicitly recognises that in making its capital 31

32 investment decisions the Authority must have regard to options appraisal, asset management planning and the strategic aims of the Authority. In compiling this capital plan each of the schemes has been measured against both the strategic aims of the Authority and in line with the IRMP. In addition under financial procedures officers cannot commit expenditure on capital schemes without first submitting a business case to either the Corporate Leadership Team or Policy and Finance Committee depending upon the size of the scheme. 2006/2007 Supported Capital Expenditure Allocations Under the old system of capital finance the amount of Basic Credit Approval was supported by revenue support grant as part of the annual settlement. Under the new procedures this support is maintained and each Authority is notified of the amount of capital expenditure which will be supported by revenue support grant. The amount for this Authority notified for 2006/2007 is 2.662m. An increase of 2% The prudential indicators for Merseyside are a) Capital Expenditure The actual capital expenditure that was incurred in 2004/05 and the estimates of capital expenditure to be incurred for the current and future years that are recommended for approval are: Actual Estimate Estimate Estimate Estimate Estimate Estimate 2004/ / / / / / /11 000,s 000,s 000,s 000,s 000,s 000,s 000,s Capital Expenditure Members will note that the big rise in expenditure in 2006/2007 includes the City Centre Fire Station at 2.5m. This is a swap deal which is self financing. More details on the capital programme are given elsewhere in the report. ADDITIONAL CAPITALISATION IN ANY FINANCIAL YEAR OF 1M WOULD ADD 1M TO THE FIGURE FOR CAPITAL EXPENDITURE IN THAT YEAR. b) Ratio of financing costs to net revenue stream Estimates of the ratio of financing costs to net revenue stream (amounts met from government grants and local taxpayers) for the current and future years, and the actual figures for 2004/05 are: 32

33 Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2004/ / / / / / /11 Ratio of Financing costs to 3.51% 3.82% 4.65% 5.21% 5.27% 5.29% 5.33% Net Revenue Stream This shows that it is forecast that debt financing costs will consume an increasing percentage of financing resources available (Council Tax increases of 4% assumed). Although the actual amount spent remains relatively small the proportionate increase in debt servicing costs is quite large. ADDITIONAL CAPITALISATION OF 1M IN 2006/07 WOULD INCREASE THIS RATIO BY.O4% IN2006/07 TO 4.69% AND BY.06% IN LATER YEARS. Effect on the Precept The estimate of the incremental impact of capital investment decisions proposed in this budget report, over and above capital investment decisions that have been previously been taken by the Authority are: Estimate Estimate Estimate Estimate Estimate Estimate 2004/ / / / / /10 Incremental Impact of Capital Investment Decisions This indicator compares the capital programme set by the Authority in last year s budget process to the proposed revised capital programme submited this year, and is intended to show the marginal impact of the overall capital programme new decisions being made by the Authority, on Council Tax levels. ADDITIONAL CAPITALISATION OF 1M RESULTS IN A FULL YEAR DEBT SERVICING COSTS OF APPROXIMATELY 0.085M (AT CURRENT BORROWING COSTS) THIS IS EQUIVALENT TO ABOUT 0.36% INCREASE IN COUNCIL TAX OR 19P. Capital Financing Requirement In accordance with best professional practice, the Authority does not associate borrowing with particular items or types of expenditure. The Authority has an integrated Treasury management strategy (elsewhere on agenda) and has adopted the CIPFA Code of Practice for Treasury Management in the Public Services. The Authority has, at any point in time, a 33

34 number of cashflows both positive and negative, and manages its Treasury position in terms of its borrowings and investments in accordance with its approved treasury management strategy and practices. In day to day cash management, no distinction can be made between revenue cash and capital cash. External borrowing arises as a consequence of all the financial transactions of the Authority and not simply those arising from capital spending. In contrast, the capital financing requirement reflects the Authority s underlying need to borow for a capital purpose. Estimates of the end of year capital financing requirement for the Authority for the current and future years and the actual capital financing requirement at 31 March 2005 are: Estimate Estimate Estimate Estimate Estimate Estimate Estimate ,s 000,s 000,s 000,s 000,s 000,s 000,s Capital Financing Requirement ADDITIONAL CAPITALISATION IN ANY FINANCIAL YEAR OF 1M WOULD ADD 1M TO THE FIGURE FOR CAPITAL EXPENDITURE IN THAT YEAR. Members will note that the capital financing requirement (CFR) is a proxy for debt outstanding. The Authority s CFR is expected to increase to 42.2m by 2011 compared to current levels (end of 2005/06) of 31.9m. A large proportion of this increase was already anticipated in last year s programme, but as discussed above :- m New Expenditure financed by borrowing Adding 2010/11 to programme If the Authority approves al the capitalisation options in ful the CFO requirement will increase by 9m to a forecast :- m This would represent (whilst affordable in terms of planned Council Tax and budgets) a relatively high level of debt for the Authority compared to recent 34

35 times and it is recommended that Members, as part of their budget decision, request a full Treasury Management Review and health check from the Executive Director of Finance during 2006/07. This will explore options for early debt redemption. Net Borrowing and the Capital Financing Requirement CIPFA s Prudential Code for Capital Finance in Local Authorities includes the following as a key indicator of prudence: In order to ensure that over the medium term net borowing wil only be for a capital purpose, the local authority should ensure that net external borrowing does not, except in the short term, exceed the total capital financing requirement in the preceding year plus the estimates of any additional capital financing requirement for the curent and next two financial years. The Authority had no difficulty meeting this requirement in 2004/05, nor are any difficulties envisaged for the current or future years. This view takes into account current commitments, existing plans, and the proposals in this budget report. UPDATED INDICATORS TO REFELCT THE FULL BUDGET DECISION WILL BE PRESENTED AT THE AUTHORITY MEETING. 35

36 INFORMATION: The Local Government Act 2003 and subsequent regulations require the Authority to set out its strategy for borrowing and to prepare an Annual Investment Strategy. The Act requires the Authority to have regard to the CIPFA Prudential Code for Capital Finance and to set Prudential Indicators for the next three years to ensure that the Authority s capital investment plans are affordable, prudent and sustainable. The Authority must also approve an Annual Investment Strategy for 2006/07 in compliance with Government Guidance on Local Government Investments issued under section 15 (1)(a) of the Local Government Act This sets out the Authority s policies for managing its investments and for giving priority to the security and liquidity of those investments. The Annual Investment Strategy is included as part of the Treasury Management Strategy Statement shown below. The Authority has customarily considered an annual Treasury Strategy Statement under the requirement of the CIPFA Code of Practice on Treasury Management in Local Authorities. The last revision of the Code was adopted by the Authority in The 2003 Prudential Code introduced new requirements for the manner in which capital spending plans are considered and approved, and in conjunction with this, the development of an integrated treasury management strategy. In compliance with both Codes the Executive Director of Finance, ICT and Procurement has prepared a proposed Treasury Management Strategy for 2006/2007, which is set out in the following pages. The Strategy outlines treasury management activity to be undertaken in 2006/2007 and the prudential and treasury management limits for the next 3 financial years which must be determined in accordance with the Local Government Act BACKGROUND PAPERS: CIPFA s Treasury Management in the Public Services: Code of Practice Prudential Code for Capital Finance in Local Authorities Local Government Act 2003 (and supporting regulations) 36

37 E) TREASURY MANAGEMENT STRATEGY STATEMENT 2006/07 Introduction The suggested strategy for 2006/07 in respect of the following aspects of the treasury management function is based upon treasury oficers views on interest rates supplemented with leading market forecasts. The strategy covers: (a) (b) (c) (d) (e) (f) - prospects for interest rates; - capital borrowings and the portfolio strategy; - annual investment strategy; - debt rescheduling; - external debt prudential indicators; - treasury management prudential indicators; Prospects for Interest Rates - Shorter-term rates Economic growth weakened from 3.2% in 2004 to 1.7% in 2005 under the impact of monetary and fiscal tightening and the oil price shock depressing household spending. It is expected to recover weakly to about 2.0% in 2006 and then return to the long term trend rate of 2.5% in House price inflation has fallen to low levels and may now stabilise. General inflation is forecast to stay around target despite the rise in oil prices. Most analysts who had been predicting an early cut in rates this year have been pushing back their forecasts to later in the year. Their expectations are that economic growth will weaken, lessening inflationary pressures and allowing for at least another cut. However, the MPC remain concerned about the "upside risks" to inflation from higher energy prices. Uncertainties over import prices and the pound are also seen as important influences on the outlook for inflation. There is little inflationary pressure to raise base rate. Inflation is expected to be broadly in line with target for the medium term and recent data suggests that growth is broadly in line with expectations. However, the balance of risks to the forecast are on the downside and it is expected that evidence of weakness of the economy will result in the MPC cutting rates from the current level of 4.50% to 4.00% during the year. - Longer-term interest rates Longer term PWLB rates which are based on the yield on government securities (gilts) fell in 2005/06 following the fall in gilt yields resulting from the high demand for gilts by insurance companies seeking to improve the credit 37

38 quality of their holdings. Gilt yields are expected to return to previous levels and longer-term PWLB rates are expected to rise from the current level of around 4.00% to reach 4.50% by the end of the year. There could be other technical factors that overlay existing pressures on longterm interest rates from time to time. Forecast Government budgetary deficits together with a shortfall of tax revenues could lead to a greater increase in gilt issuance. This would put add downward pressure on gilt prices i.e. increase gilt yields and, thereby, increase PWLB rates. Capital Borrowings and the Borrowing Portfolio Strategy The Authority's net capital borrowing requirement for 2006/2007 is presently estimated at 8.8 million but may reach 17.8 million if capitalisation plans are approved. This would mean the Authority s borowing rising from 29.2 million to 47 million, (see discussion above). The anticipation is that short-term and variable rate will become lower than longer term fixed rate borrowing during 2006/07 provided base rate falls as expected but longer term borrowing may offer good value earlier in the year. Based on the prospects for interest rates outlined above and the increased level of debt during the year, it would be prudent to spread the maturity dates of new borrowings. Best value will therefore be achieved by borrowing at longer term rates earlier in the year and at short term or variable rates later in the year in order to minimise borrowing costs. Against this background, the interest rate market will be monitored and a pragmatic approach will be adopted to any changing circumstances. ANNUAL INVESTMENT STRATEGY Principles 1. The purpose of the Annual Investment Strategy is to set out the policies for giving priority to the security and liquidity of the Authority s investments. The strategy deals with the credit ratings defined for each category of specified investments, the prudential use of non-specified investments, and the liquidity of investments. 2. This Authority has regard to the ODPM s Guidance on Local Government Investments and CIPFA s Treasury Management in Public Services: Code of Practice and Cross Sectoral Guidance Notes. 3. All investments will be in sterling. The general policy objective for the Authority is the prudent investment of its treasury balances. The Authority s investment priorities are (a) the security of capital and (b) liquidity of its investments. The Authority will aim to achieve the optimum return on its investments commensurate with the proper levels of security and liquidity. The Guidance maintains that the speculative borrowing of 38

39 monies purely to invest is unlawful and the Authority will not engage in such activity. 4. All cash balances will be invested in accordance with the Code of Practice and with regard to ODPM guidance. Under the guidance investments fall into two separate categories, either specified or nonspecified investments and there should be further regard to liquidity levels. 5. A counterparty list of institutions with which the Authority will invest shall be maintained by reference to the criteria set out below for the different categories of institution and their credit rating. Specified Investments 6. Specified investments offer high security and high liquidity and satisfy the conditions set out below: - The investment is denominated in sterling and any payments or repayments in respect of the investment are payable in sterling only. - The investment is not a long-term investment (has a maturity of less than one year). - The investment does not involve the acquisition of share capital or loan capital in any body corporate. - The investment is made with a body or in an investment scheme which has been awarded a high credit rating by a credit rating agency OR - made with the UK Government or a local Authority or a parish or community Authority. 7. It is proposed that specified investments comprise the following institutions: UK local authorities Debt Management Account Deposit Facility Money Market Funds UK Banks, foreign banks registered in the UK and mutual building societies with a high credit rating 8. A high credit rating is interpreted as the Fitch Ratings Ltd criteria currently applied to the lending list. To be deemed highly rated the institution must satisfy at least the minimum of all three criteria: Long term credit rating A Short term credit rating F1 Individual rating C 39

40 9. The credit ratings and limits proposed for the categories of investments intended for use by the Authority in 2006/07 are as follows: UK local authorities 2 million Debt Management Account Deposit Facility 2 million Money Market Funds (AAA rated) 2 million UK Banks (AA or higher rated) 3 million UK Banks (A or higher rated) 2 million Foreign banks registered in the UK (AA or higher rated) 2 million Mutual building societies (AA or higher rated) 3 million Mutual building societies (A or higher rated) 2 million The maximum that may be invested with different banks that are part of the same conglomerate shall not exceed the maximum of the highest rated bank within the group. The limits may be exceeded for short periods when there are adverse conditions in the money market with the agreement of the Executive Director of Finance, ICT and Procurement or Treasury Manager. 10. Bank and Money Market Fund ratings are checked at least each month. The Authority is alerted by when there is an amendment to the credit rating of any institution. If an amendment means an institution no longer meets the Authority s minimum requirement that institution is removed immediately from the counterparty lending list. Should an institution not on the counterparty list achieve the minimum rating that institution can then be added to the list. Non-specified investments 11. Non-specified investments do not, by definition, meet the requirements of a specified investment. The ODPM guidance requires that greater detail is provided of the intended use of non-specified investments due to greater potential risk. It is proposed that the only type of non-specified investments undertaken are with mutual building societies that do not meet the specified criteria above. 12. The majority of building societies do not provide credit ratings to the credit rating agencies (so cannot be classed as specified investments) and inclusion on the lending list and individual lending limit has hitherto been determined by asset size. It is proposed to continue current practice and select the top twenty building societies, determined by asset size, for inclusion on the counterparty list. Those societies that are within the top twenty but do not have an agency determined credit rating shall have an individual limit of 4 million. Those that are credit rated will have limits determined by the criteria for specified investments. Building Society rankings are checked annually with the Building Societies Association. 40

41 Liquidity of investments 13. Each investment decision is made with regard to cash flow requirements resulting in a range of maturity periods within the investment portfolio. All investments are short term having a maturity of less than one year and there is no proposal to change this approach (although the Prudential Code does allow long term investments). It is proposed that the maximum period for which funds may prudently be committed is 12 months. Reporting Arrangements 14. The Investments Strategy forms part of the Treasury Management Strategy which is referred to Policy and Finance Committee for monitoring. Treasury Management activity is reported to Members during the year in the quarterly budget monitoring reports and in a final annual report by 30th September following the end of a financial year. Debt Rescheduling Rescheduling of debt is the early repayment of loans and replacement by loans for different periods and at different interest rates. It can be used to enhance the balance of the long term portfolio by for example amending the maturity profile or changing volatility levels and may on occasion generate cash savings. Debt rescheduling becomes more beneficial when the relationship between short and long term rates moves appreciably. Interest rate structures will be continually monitored in order to take advantage of any perceived abnormalities in the yield curve. Should any rescheduling take place, it will be reported to Members in the scheduled monitoring reports. External Debt Prudential Indicators: The Prudential Code requires the following external debt indicators of prudence: - Authorised limit for external debt; - Operational boundary for external debt It should be noted that these limits have been set based upon the assumption that the capital programme and al capitalisation options wil be approved by the Authority. - Authorised Limit In respect of its external debt, it is recommended that the Authority approves the following authorised limits for its total external debt gross of investments for the next three financial years. These limits separately identify borrowing from other long term liabilities such as finance leases. 41

42 Authorised Limit for External Debt 2006/ / / Borrowing 52,000 53,200 55,400 Other Long Term Liabilities 2,000 2,000 2,000 TOTAL 54,000 55,200 57,400 The Authority is asked to approve these limits and to delegate authority to the Executive Director of Finance, ICT and Procurement, within the total limit for any individual year, to effect movement between the separately agreed limits for borrowing and other long term liabilities, in accordance with option appraisal and best value for money for the Authority. These authorised limits are consistent with the Authority's current commitments, existing plans and the proposals in this budget report for capital expenditure and financing, and with its approved treasury management policy statement and practices. They are based on the estimate of most likely, prudent but not worst- case scenario, with an additional sufficient headroom over and above this to allow for operational management, for example unusual cash movements. Risk analysis and risk management strategies have been taken into account; as have plans for capital expenditure, estimates of the capital financing requirement and estimates of cash flow requirements for all purposes. - Operational Boundary The Authority is also asked to approve the following operational boundary for external debt for the same period. The proposed operational boundary for external debt is based on the same estimates as the authorised limit but without the additional headroom included within the authorised limit. Operational Boundary for External Debt 2006/ / / Borrowing 47,000 48,200 50,400 Other Long Term Liabilities 2,000 2,000 2,000 TOTAL 49,000 50,200 52,400 The operational boundary represents a key management tool for in year monitoring by the Executive Director of Finance, ICT and Procurement. Within the operational boundary, figures for borrowing and other long term liabilities are separately identified. The Authority is also asked to delegate authority to the Executive Director of Finance, ICT and Procurement, within the total operational boundary for any individual year, to effect movement between the separately agreed figures for borrowing and other long term liabilities, in a similar fashion to the authorised limit. 42

43 The Authority s externaldebt at 31 st March 2006 is forecast to be 29.2 million. It should be noted that actual external debt is not directly comparable to the authorised limit and operational boundary, since the actual external debt reflects the position at one point in time. In taking its decisions on the budget report, the Authority is asked to note that the authorised limit determined for 2006/07 will be the statutory limit determined under section 3(1) of the Local Government Act Treasury Management Indicators: The Prudential Code requires the following Treasury Management indicators of prudence: - Upper limit on fixed interest rate exposures; - Upper limit on variable interest rate exposures; - Upper and lower limits for the maturity structure of borrowing; - Total principal sums invested for periods longer than 364 days. - Interest Rate Exposures It is recommended that the Authority sets an upper limit on its fixed interest rate exposures for 2006/07, 2007/08 and 2008/09 of 100% of its net outstanding principal sums. It is further recommended that the Authority sets an upper limit on its variable interest rate exposures for 2006/07, 2007/08 and 2008/09 of 50% of its net outstanding principal sums. This means that the Executive Director of Finance, ICT and Procurement will manage fixed interest rate exposures within the range 50% to 100% and variable interest rate exposures within the range 0% to 50% for 2006/ Maturity Structure of Borrowing It is recommended that the Authority sets upper and lower percentage limits for the maturity structure of its borrowings as follows. Percentage of projected fixed rate borrowing that is maturing in each period: Upper Limit Lower Limit Under 12 months 30% 0% 12 months and within 24 months 30% 0% 24 months and within 5 years 30% 0% 5 years and within 10 years 30% 0% 10 years and above 90% 50% 43

44 - Total principal sums invested for periods longer than 364 days It is recommended that the limit for investments of longer than 364 days be set at 2 million for each of the years 2006/07, 2007/08 and 2008/09. 44

45 F) REVENUE FORECASTS A five year financial revenue estimate has been prepared and the results are set out in the table below. MFRA BUDGET and Five Year Financial Plan Expenditure 2006/ / / / /2011 'm 'm 'm 'm 'm Revised Base Budget Replenish reserves INFLATION Pensions Funding Changes Remove Pensions Costs In Base Add back employer on-cost Add Back Injury pensions Ill Healths 2005/ Ill healths 2006/07& onward Impact of Capital Programme New Growth Nil Nil Nil Nil Nil PFI Rentals Less Savings TOTAL EXPENDITURE Income Government Support(RSG & NNDR) Precept Income Taxbase increase Precept Increase at 4% Collection Fund TOTAL INCOME DEFICT TO BE Gap BRIDGED to be funded by further Savings This forecast has identified an initial estimate budgetary deficit for 2006/07 of million. In preparing this estimate a number of assumptions and estimates have had to be made. Budgetary and Financial Plan Assumptions In compiling the plan, the Executive Director of Finance has, in consultation with the Chief Fire Officer, made a number of assumptions of both a technical nature and also about the policies that the Authority might be mindful to pursue in its aim for a Fire Safety Community. 45

46 Base Budget for 2006/2007 In recent years the Authority has set a bold medium term financial strategy that has been successful in achieving its target council tax increases of less than 4% per year. Each year it normally begins its planning process by starting with its agreed plan for the medium term and assessing the changes from that medium term strategy. However, this year the Government has announced the introduction of new funding arrangements for firefighters pensions (pensions being in excess of 20% of expenditure) that will remodel the Authority s budget. Therefore the decision has been taken to zero base the financial plan and to reconstruct it from first principles. Base Budget The starting point for constructing a new financial plan has been the base budget set for 2005/06 which was a budget requirement of million. Members will recall that in setting that budget they recognised the exceptional pensions expenditure forecast to happen in the year and used a number of one-off measures to reduce expenditure and council tax. It is necessary to add back these sums to get the true underlying base budget position. In addition the base needs to be adjusted for items of one-off growth in 2005/06 only and for the impact of Authority decision taken during the financial year. These are summarised in the table below, the base budget is therefore m:- 'm Budget Requirement 2005/ Add Back Use of reserves Add back savings targets Deduct 2005/06 Growth Only Approved Amendments in 2005/ Revised Base Budget to use in the Financial Plan Full details of the adjustments are in Appendix 3. The most significant policy decisions are:- Mainstreaming Advocates Programme Creating a Threat Response Group Introducing LLAR Pilot It should be noted thatmost of the Authority s costs are stafing costs. This base budget is costed by using the Authority s stafing model which was considered on the 9 th February. 46

47 Forecasts have been based upon the agreed staffing model :- No Wholetime Equivalent Number Uniformed Firefighters W/T (including Recruits) Retained Control Room Other/Non Uniformed Recruitment As a result of the assumed target number of Firefighters compared to the current numbers of actual employees and having allowed for the impact of retirement, effectively the base forecast anticipates that the Authority will recruit to maintain the target number of Firefighters, and would therefore induct approximately 80 new recruits. This number will be modified by any budgetary decisions made by the Authority and or variations in retirement profile. One recruit course of Firefighters in 2006/ /06 Position Elsewhere on the agenda appears the third quarter Financial Review for 2005/06 (CFO/21/06). This report identifies a significant overspend on pensions costs in 2005/06. This has been offset by significant overachievements in dynamic staff savings targets and in other efficiency savings, however the worst case position if every firefighter eligible for retirement retires at the earliest possible date is an over spend on the overall revenue budget of 2.527m. In order to finance this deficit the revenue reserves of the Authority will have to be used. Revenue reserves are held as a hedge against the level of financial risk facing the Authority. It is not considered that the level of financial risk has altered materially therefore it is expected that the Authority will need to replenish its reserves as part of its budget decision in 2006/07. (The final report will include full information to assist members to choose their strategy on financial reserves). In order to improve the forecast for 2005/06 the Executive Director of Legal Services and HR has conducted further research to confirm the likeliest retirement profile so that this can be considered on the 28 th February (see Budget Options). 47

48 Inflation The forecast plan includes a contingency for pay awards and price increases in each year. This has been prepared using the following assumptions; Non Uniformed Pay 3% April of each year Uniformed Pay 3% in July of each year All Other Price Inflation 2.5% The total provision for pay and price inflation is 2.000m for 2006/2007 As an indicator to members and a guide in assessing the volatility of inflation estimates - a movement of 1% in pay inflation for firefighters equates to approximately 0.400m. This represents a relatively tight provision, considering likely cost increases in rates and energy costs and will be monitored closely throughout the year. Fire fighters Pensions The Fire-fighters pension scheme is an unfunded pay as you go one so the net cost of ongoing pensions and lump sums (after pension contributions from current fire-fighters) has, in the past, had to be funded from the Authority s revenue resources. The ever-increasing burden of these costs has caused major budgetary pressures for the Authority despite its best efforts to contribute prudently to an earmarked reserve to smooth payments for pension lump sums. The Government has announced plans to change the way that these pensions are funded. In summary the proposed impacts on the Authority s revenue position are:- The Authority will move net costs of account: million out of its revenue Ongoing Pensions Costs Commuted Lump Sum payments The income from Firefighters pension contributions (11%) These transactions will be put in a separate new pensions account. This wil be replaced by an employer oncost for pensions which wil be expenditure for the Authority paid into the new pensions account. The level of this has been set by actuaries at 21.3% for 2006/07 ( million). The Authority wil stil have to meet the cost of injury pensions awarded previously since these are considered compensation and not true pensions cost by the Government. This is 1.3m per annum 48

49 The Authority will have to pay a penalty for ill health retirements in 2006/07 and for those ill-health retirements that have occurred in 2005/06. (This was introduced as a penalty to prevent authorities exploiting the proposed funding changes). The charges for 2006/07 and future years can be spread across three years. These will also be income to the pensions account. The final details of how these injury payments are awaited. These are expected to be two tiers of payment, which relate to the level of disablement caused by the il health. The penalty for upper tier il health pensions is quite high (4 times salary), and if the Authority had relatively high levels of such retirements, this could be a significant cost. The Authority has made great strides in managing ill health and injury retirements, but this represents an area of high financial risk. The Executive Director of Finance will report back as ODPM guidance becomes clearer. The Government will pay the deficit on the pensions account as a separate top up grant in addition to revenue support grant. In relation to Revenue Support Grant (RSG) the Authority used to receive a specific amount of RSG from central government for pensions. This has now been removed from income streams. Money has been left in the grant calculation to help authorities pay their 21.3 percents and injury pensions. However, since RSG is calculated predominantly on the basis of population topped up by various risk factors. Since Merseyside appears to have compared to its population and risks relatively high numbers of wholetime firefighters and injury pension costs the overall impact of all these transactions is significantly adverse - 2.5m on the revenue position although it should be noted that the medium term impact of the new arrangements will be good for Merseyside. The financial forecast has been adjusted by the net impact of these transactions, which were explained to Members in detail at the budget seminar. Cost of Capital Borrowing The revenue impacts of capital investment decisions (discussed in earlier sections) are added to forecasts. The proposed capital programme is attached at appendix 1. PFI The Authority has been successful in winning PFI credits to make a massive investment in our building stock as part of leading a Northwest fire service project. The anticipated lease costs arising from this have been built to budgets from 2008/09 and future years. Provision has been built into the financial plan for 0.5m in consultancy costs spread over the next four years m per year. The Authority would require assistance to take forward a specialist scheme of this complexity in 49

50 the fields of finance, law and property. Whilst the fees may seem large they represent only 1.2% of the forecast capital cost of the project ( 41.3m). In order to minimise the costs the Director of Finance has been in contact with some of the Districts with PFI expertise to see how knowledge and experience might be shared. In addition, the Chief Fire Officer has been in discussion with Tyne and Wear fire Service who have recently completed a similar successful PFI scheme with a view to sharing building plans in order to minimise cost. New Growth Officers collate bids for new growth from spending officers in relation to the IRMP and other required new growth pressures. The total of initial bids received was in excess of 2.5m. After examining these in detail officers have identified two key investment themes Community Fire Safety and Prevention New Dimensions In addition the Authority has received two new grants for (a) (b) Community Fire Safety 0.333m (replacing Arson Task Force and Innovation Fund Monies) Additional Unanticipated New Dimensions Grant for 2005/06 and 2006/ m Having reviewed all the areas of potential growth officers believe that these can be contained within current budgets and/or funded by redirecting the grant monies toward the themes identified within the growth bids. In particular officers are keen to preserve the principle that the Authority has established in relation to CFS grants that all new monies should not be used to prop up curent budgets but to add value and contribute to making Merseyside safer keeping the Authority at the forefront of innovation. In light of this no provision has been made for additional new growth within the budget. The Chief Fire Officer will report back on how he has managed reinvestment to deliver growth in line with these key themes. Resources Available The forecast for 2006/2007 has been adjusted to reflect the final Revenue Support Grant settlement which was released on 31 January. The formula for grant distribution was not changed from the provisional proposals in the light of any representations. The total increase in Government grant for the Authority is 1.5% ( 0.653m). This compares poorly to pay and price increases (particularly firefighter pay) which are expected to add 2m p.a. 50

51 The Fire Authority is at the floor for grant increases and has therefore the lowest grant increases in the country. The Government has abandoned the use of ceilings for grant increases so in contrast some other fire authorities have received increases of as much as 6.3%. If it was not for the operation of the floor, the Authority s grant entitlement would have been significantly less. The supported borrowing level for the Fire Authority the amount we can borrow and get Government support for repayment costs has increased by 2% to 2.662m. Half the transitional funding has been recouped. The government has also announced the provisional grant figure for 2007/08 - a further increase of 2.7% or 1.193m. Government support for future years beyond 2007/2008 is uplifted at an assumed floor of 3.0% since it is anticipated that we will have very low (floor) grant increases until our actual grant catches up with the formula grant. Council Taxbase The Districts of Merseyside have set their taxbases for 2005/06 and 2006/07 and they are shown in the table below:- 2005/ /07 Variance TAXBASE TAXBASE LIVERPOOL 128, , WIRRAL 104, , ST.HELENS 54, , SEFTON 93, , (45.60) KNOWSLEY 42, , (144.00) 422, , , Current Band D Council Tax Income at Current Copuncil tax levels 22,773, ,836, , The total taxbase for the Authority has increased by (0.27%), this means that each 1 of Council Tax will generate an additional 1, The result of this is that the income from the current level of Council Tax is anticipated to increase by 62, This means that the income forecast from a 1% increase in Council Tax in 2006/2007 is now 228,

52 The forecast assumes Council Tax increases at 4% per year in 2006/07 and future years (assumes a Band D Council Tax of for 2006/07). Surplus and Deficit on Collection Funds The Districts of Merseyside have reviewed their collection funds and identified the proportion of any surplus or deficit attributable to the Authority. The results are set out in the table below and show a net deficit of 20,185:- District Collection Fund (surplus)/deficit LIVERPOOL 94,000 WIRRAL (74,800) ST.HELENS 985 SEFTON Nil KNOWSLEY Nil TOTAL 20,185 52

53 G. Budget Options The forecast indicates that the Authority has a significant deficit to address in 2006/02007 of 8.499m with an underlying budget gap of around 6m. This has arisen for the reasons set out above:- Exceptional pensions expenditure in 2005/06 depleting reserves The Authority hoped that new funding arrangements for firefighters pensions would eliminate the pensions problem altogether by returning expenditure to an average position. In fact the proposals, whilst stopping the problem getting any worse maintain the net revenue position at the exceptional 2005/06 position. Therefore the Authority needs to repeat the one-off savings used to support the 2005/06 position. The significant imbalance between inflation and grant increases. Underlying Problem It should be noted that the Authority s revenue Support Grant is now entirely awarded on the basis of population topped up for by a number of relative risk factors. Itis clear that the Authority s overal spending levels are considerably higher than its grant income and capacity to generate income from council tax. In very crude terms the Authority has compared to its grant income, relatively, too many wholetime firefighter posts given its overall population and the level of risks facing the community of Merseyside. Whilst it can lobby the Government to change the formula for grant and/or provide additional resources, the prospects for a significant improvement in cash terms is not considered good. The Authority must therefore take action to address its underlying cost base in the medium term as part of the financial strategy it adopts. Agreed Authority Strategy for this Eventuality The problem does not come as a surprise to the Authority and it specifically recognised this in its budget decision last year with a contingency plan, should its assumptions not be correct, to approach the Secretary of State for permission to capitalise expenditure:- In relation to option S5 recognise that the Authority has prudently planned for firefighters pensions in the past and in particular the peaks in expenditure anticipated in 2004/05 and because a large number of firefighters recruited at the same time become eligible for retirement - and has for many years set aside monies in a pensions reserve that totalled 4.2m at the start of 2004/05. Previous forecasts had anticipated that some of that reserve would be used in 2004/05 and that expenditure would then sink below average levels until 2008 allowing the Authority the flexibility to contribute back to reserves. However, because of a number of factors including the 16% firefighters pay award, retirements retiring sooner than previously forecast and the increased longevity of pensioners, the latest forecasts indicate that:- 53

54 the Authority s pensions reserve wil be fuly used up by mid 2005/06. Expenditure on pensions wil not drop below average levels so the Authority wil not be in a position to replenish the reserve without big increases in expenditure and the resultant council tax increases This creates a major medium term financial problem for the Authority. The latest guidance from central government on this issue in the National Framework for Fire and rescue services indicate that they recognise this problem and are working to introduce a new arrangement for financing firefighter pensions for April The Authority s strategy is therefore to work with central government to develop a solution through the national framework that minimises the impact of the surges of expenditure on the council tax payers of Merseyside If the national arrangements are not forthcoming or in their implementation do not adequately smooth the financial burden on council tax payers the Authority will seek to capitalise the costs of pensions (or other similar techniques) in order that the burden of firefighter pensions is prudently managed over a medium timescale to allow financial planning targets to be met. If this strategy is not successful it is recognised that the Authority may face significant tax increases in the next few years. Option S1 Capitalisation of Pensions in 2005/06 As:- (a) (b) (c) the impact of the exceptional pensions expenditure in 2005/06 became clearer the details of funding arrangements for firefighters pensions were announced the draft local government grant settlement for 2006/07 was released (report CFO/260/05) It soon became clear that it would become necessary to adopt the Authority s contingency plan and to apply for capitalisation. A decision was made to lobby the Minister Jim Fitzpatrick MP about the issue and a delegation of the three party leaders, Chief Fire Officer and Executive Director of Finance met with him on the 9 th January. The Policy and Finance committee of the 15 th December gave delegated powers to this group to prepare a strategy for lobbying. In line with the Authority s approved plan it was decided to prepare a positive submission based around a solution to the budget problem that provided a coherent medium term financial strategy. This was presented to the Minister on the 9 th January and appeared to be well received. The Executive Director of Finance submitted, following the meeting with the Minister, a formal application to capitalise the exceptional pensions 54

55 expenditure in 2005/2006 of an anticipated 7.5m. This application has been the subject of considerable ongoing correspondence between officers and ODPM officials. The ODPM have said that they will give an update on the position on the 24 th February, but have not given a commitment to complete their administrative processes to provide a decision for the 28 th February. This piece of information forms such a key strand to the Authority s budget position that this is the main reason that a decision was not able to be taken on the 9 th February. If the Authority is successful in its application to capitalise expenditure it will:- Treat the exceptional expenditure as capital Borrow money to fund that expenditure and spread the cost over the life of the debt repayments Pay future principal and interest from its revenue accounts. This is forecast to be 0.641m p.a. if repaid over 25 years. The reduction in expenditure in 2005/2006 will create a revenue reserve that can be applied to keep council tax down in future years Permanent Savings Options Options S2 and S3 Change Policy on Smoke Alarm Accounting Information Officers consider that it is appropriate for the Authority to review its accounting treatment of smoke alarms and their installation in the light of :- Guidance received relating to the capital grants awarded for smoke alarms in 2004/05 and ongoing years (FSC/ / ). Guidance received from the ODPM and Audit Commission as part of the closure of the final accounts 2004/05. Evidence collated to show how the massive investment in smoke alarms is benefiting the community of Merseyside. The increased investment by the Service in smoke alarms in 2005/06. Historical Position Merseyside commenced its innovative programme of Home Fire Safety Checks and fitting free smoke alarms in At that time :- In the absence of ODPM guidance; and 55

56 Because the investment benefit in Merseyside was not proven; Both the costs of the smoke alarms and the costs of installation were charged to the revenue account of the Authority. This continued until 2004/05. In that year, the Government agreed to fund authorities to purchase smoke alarms (FSC/46/04). Merseyside was awarded the following CAPITAL grants 169K 2004/05 169K 2005/06 169K 2006/07 339K 2007/08 The funding was to meet the cost of procuring and installing 10 year battery alarms or automatic fire suppression systems. It was identified that there were a variety of ways of instaling alarms, including the use of fire service operational and non-operational staff. This circular was received in October Merseyside has always spent well in excess of the grant on procuring smoke alarms (not including any installation costs). It has up to now, planned to fund the excess expenditure over capital grant by a revenue contribution. Further guidance on the accounting arrangements was received in August 2005 (Circular ). The current position may be summarised as :- 10 year battery smoke alarms can be treated as capital, as they are longlife in nature and can be seen as a fundamental improvement to a property. They are not enhancements to the Authority s own property, but Regulation 25(1)(e) of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 was introduced to cover such circumstances and allows them to be treated as capital expenditure. As capital expenditure, the costs of installing the smoke alarms may also be capitalised. The fire authority for the most part has installed smoke alarms by using its firefighting workforce. The expenditure would be written off to revenue in the year incurred from an accounting point of view, but the impact on the revenue account would only be the costs of debt servicing bringing a net revenue savings. Contact with other authorities have revealed that several fire authorities have decided to adjust their policies. 56

57 If the Authority agrees this change of policy, the full cost of smoke alarms and their installation will be treated as capital expenditure and be funded by borrowing (instead of revenue contribution). This will generate savings in the revenue budget offset by increased costs of borrowing as set out in the table below. 2005/ / / / Capitalise Smoke Alarms Capitalise Installation Costs Cost of Borrowing (116) (175) (272) (360) Net Saving These figures are calculated on the basis of repaying the debt over the life of the alarms 10 years and making additional MRP payments. Members wil note however that for both these capitalisations are a one-of measure that creates a revenue reserve that can only be used once. The District Auditors golden rule needs to be considered reserves are a one-off pool of money that should only be used to support one-off expenditure or as part of a sensible medium term strategy that tackles underlying budget problems. S4 Review of 2005/06 Pensions Forecast Members will recall that a potentially huge overspent on pensions is anticipated in the forecast for 2005/06. that forecast was prepared on the worst case scenario if every individual eligible for retirement went before the end of 2005/06 and the Authority had to meet the full cost of lump sum payments. The Executive Director of Law & HR has conducted a telephone based review of all potential retirees. This has identified 18 individuals who have stated that they do not expect to retire before 1 st April, The potential lump sum payments relating to those individuals is estimated to be 1.7m. The figure is high as many of the stayers are senior oficers. Members may chose to assume this improvement in the forecast position as part of their budget decision. If Pensions expenditure in 2005/06 is lower than set out in forecasts, the Authority should seek to minimise the capitalisation of pensions expenditure to a level that reflects exceptional expenditure only. 57

58 Retirements post 1 st April, 2006 will not be funded directly from the revenue account. S5 Dynamic Staff Savings targets From 2006/07 onward when the Authority will pay an employer on-cost of 21.3% on firefighters pay for pensions the total of the Authority budget spent on pay related items will become 81% of all expenditure. Significant savings in costs can not be delivered without reducing the costs of staffing by becoming more efficient. The Chief Fire Officer has reviewed these budget areas and having considered in particular the facts that:- The Authority is firmly committed to a policy of no compulsory redundancies The Authority is well placed to deliver savings without compulsory redundancy because of the ongoing high numbers of retirements of whole time firefighters The Authority is committed to maintaining its high attendance standards The Authority is committed to keeping all fire stations open has identified that, having reviewed in detail the following areas significant staff efficiencies can be delivered in the future. 1. Implement flexible response in accordance with IRMP 2. Increasing the number of Small Fires Units 3. Develop the capacity of Search & Rescue at Croxteth Fire Station 4. Implement crewing of Birkenhead aerial 5. Expanding LLAR stations pilot 6. Reviewing the Resilience & Reinforcement Team in the light of improved management and experience 7. Reviewing the Incident Management Team in the light of improved management and experience 8. Implement the review Fire Safety Officers and Senior Officers (Already agreed by the Authority) 9. Reviewing control room staffing 10. Identifying support service/staff savings costs (Including offering voluntary redundancy and potentially early retirement) Whilst each of these areas needs to be reviewed in detail it is anticipated that the overall impact would be an increase in jobs available within the fire service of over 80 posts. This would replace wholetime firefighter roles with a wide variety of opportunities including retained contracts, part time working, overtime and secondary contracts. These will as well as giving a broader range of opportunities for all of the Merseyside community to work for the Fire Service and will allow current employees significant chances to earn additional pay if they so wish. 58

59 In the light of the currently anticipated rate of retirements (shown below) Forecast Retirements / / / / / /11 the maximum rate at which these efficiencies can be delivered is 2006/07-3m 2007/08-4m 2008/09-5.2m S6 General Savings Target (Non staffing) Members set an efficiency target of 0.250m for 2005/06 in relation to non pay lines, which was met. The Authority may wish to consider repeating this option. S7 ICT Savings Target (telent) Our ICT partners telent (formerly known as Marconi) have reacted very positively to our financial position, and have agreed to set jointly with the Authority a target for savings from ICT budgets of 3-5% per annum over the next 3 years. The fine detail of this is being negotiated but the option anticipates savings of :- 2006/ / / ICT Savings Target Jointly with telent Summary of Savings Options In total the Options above may be summarised as in the table below. 59

60 2005/ / / / / / One-off measures Permanent Savings TOTAL One-off Savings Members will note that significant one-off savings have been identified. These are options which are available only once and after being used will not be available in future years. They will not therefore tackle any underlying budget deficit. It is recommended that members should only consider using one-off measures as part of a medium term financial strategy that does address underlying deficits. GROWTH OPTIONS G1 Additional Youth Work Officers have identified one specific growth item that the Authority may wish to consider. Setting aside 0.050m p.a. to support theauthority s innovative work with young people by jointly progressing projects through its volunteer arm the Fire Support Network. Precept Increase Members will have to decide their strategy for the precept and consider the acceptability of precept increases over the next few years. Potentially a larger precept increase might be used to help bridge the revenue budget gap. Council Tax Capping Universal crude capping of Council Tax has been abolished. However, new reserve powers have been introduced in the Local Government Act 1999 that allow the Secretary of State to intervene in certain instances. The Government has repeatedly said :- We expect al local authorities to budget prudently and that the average Council Tax increase in England will be less than 5% next year. It is clear that authorities setting high Council Taxes might well face capping. The Government has used its powers in recent years and capped a number of Authorities. The cost of rebiling in the five Districts of Merseyside should the Authority be capped is estimated at 2m. 60

61 The ready reckoners below wil give members a guide on the impact of various precept levels Council Tax Increase 1% 4% 5% 10% 37.3% Band D Council Tax Increase ( ) Extra Income Total ' ,142 2,283 8,516 Impact on District Precepts '000 LIVERPOOL ,588.3 WIRRAL ,105.4 ST.HELENS ,104.4 SEFTON ,874.7 KNOWSLEY , , ,

62 H) ADEQUACY OF RESERVES AND BALANCES Responsibilities of Chief Finance Officers Under Part 2 of the Local Government Act 2003, the Chief Finance Officer of an Authority is now required to comment 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 then 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 the Fire Authority the Chief Finance Officer is the Executive Director of Finance, ICT & Procurement Kieran Timmins. For the purposes of the Act the financial reserves of the Authority would incorporate Earmarked Reserves and Working Balances. To make a final judgement on these issues it will be necessary to consider the proposed budget decisions of the Authority in the light of this budget report. Robustness of Estimate To fully satisfy the Chief Finance Officer 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. 62

63 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. Adequacy of proposed Financial Reserves Under the 2003 Local Government Act the Secretary of State may enact Regulations that define certain types of controled reserves and the minimum level for those Reserves. At the time of preparing this report the Secretary of State has not enacted any such Regulations. However, the 2003 Act still places a requirement upon the Chief Finance Officer to report if the level of reserves is likely to be inadequate. That report should contain comment upon: the reasons for that situation the actions if any, considered appropriate to prevent the situation arising. There is then a requirement for the Authority to respond to the report when making decisions on its future financial reserves. In recent years the Authority has maintained a general revenue reserve of in excess of 1.4m and usually in excess of 2m. It has also maintained a number of earmarked reserves most notably the pensions reserve. The recent pilot Comprehensive Performance Assessment (CPA) performance indicator relating to Financial Reserves indicates that an appropriate level of General Fund Working Balances at the end of the financial year should be at least equal to 5%. of forecast Net Operating Expenditure. or there is a financial risk management process operating which the Authority uses to justify a lower level of reserves.. This is for normal, multi-service local authority. For the Authority 5% forecast Net Operating Expenditure equates to approximately 3.75 million. However:- a) The Authority s risk management arangements have improved. As part of this budget process the Director of Finance has prepared a financial risk management matrix and also assessed the year on year variation in risk facing the Authority. This takes account of the corporate risk register. 63

64 b) The Authority has previously maintained a number of specific earmarked reserves against risk, most notably the pensions reserve which act as a significant hedge against the biggest single liability facing the Authority. c) The Authority is single purpose and does not face as full a range of risks to manage as a multi-purpose authority. d) The Authority is unlikely to face significant increases in cost because of uncontrollable demand issues (unlike for example Social Services care for the elderly). e) Members will note that the Authority s revenue reserves have not generally been consumed during the year by overspendings but have been maintained throughout the year. Having reviewed the Authority Risk Register and prepared a detailed costing of financial risks, the Executive Director of Finance recommends that in the light of all risks facing the Authority that it should aim to maintain a general revenue reserve of 2m (in so far as the Secretary of State decision on capitalisation will allow). If the decision is not positive, further risk analysis is required to assess :- The costs of capping and the risks associated. Potential costs of compulsory redundancy and attendant financial risk including strike costs. The currently forecast position on anticipated reserves is set out below:- Originally budgeted Position Current Ouutturn Forecast Originally budgeted Position Movement Movement Forecast Reserves and Balances In Year In Year 'm 'm 'm 'm General Revenue Reserve or Working Balance * (2.589) (4.872) - Pensions (2.198) (2.198) - Earmarked Reserves Bellwin Emergency (0.147) - Insurance - Uninsured Risks (0.050) Emergency Planning reserve (0.075) - Modernisation Reserve (0.149) (0.149) - Regional Efficiency Reserve Used for pensions Total All Reserves Members should bear in mind that reserves and balances should only be used to finance one-off expenditure. If such monies are used to fund ongoing revenue expenditure without taking action to reduce underlying expenditure, the Authority would find itself facing the same deficit in the next and future years but without reserves available to finance it. This is underlined by the District Auditor s Golden Rule - that one of revenue reserves should not be used to support ongoing revenue expenditure. 64

65 Review of Reserves and Balances Members need to consider their strategy on reserves and balances in the light of the guidance from the Director of Finance above. Consultation The Authority has consulted on its budget decision in a variety of ways. (1) IRMP Consultation As part of the IRMP consultation, some respondents commented on the level of Council Tax. The key message was that whilst recognising that planning for 4% might seem reasonable, this is still twice the rate of inflation and will cause problems for pensioners and those on low incomes. (2) Consultation with Business Officers met with Liverpool Chamber of Commerce and the key issues were :- Since business rates are set nationally, local precept decisions do not impact on local business. The Chamber is supportive of the Authority s :- - Community Fire Safety work - Excellent response standards - Preventative work (3) Consultation with Unions/Staff Staff and Trade Unions have been kept up to date with the budget process by :- Letters to home addresses s Setting up of a dedicated budget page on the website and intranet. Trade Unions were invited to the Members Budget Seminar and were given the opportunity to contribute to the debate by making presentations. Unison took advantage of the opportunity and made a presentation which emphasised :- - the importance of non-uniformed staff in service delivery. 65

66 - the willingness of Unison to work with the Authority to tackle the budget deficit effectively. FBU The Fire Brigades Union declined the opportunity. FBU officials have met with the Executive Director of Finance to discuss the budget and there has been some correspondence (Attachment 6), but at the time of writing no response has been received. Budget Timetable There is a legal requirement for the Authority to set a balanced budget and decide its level of precept before 1 March Equality Implications The five year plan makes provision for investment in Equality issues of 0.1m in each future year. BACKGROUND PAPERS 66