London Borough of Sutton
The Executive - 5 July 2011
Joint Report of the Strategic Director – Resources and Executive Head of Policy and Customer Services
BUSINESS AND FINANCIAL PLANNING 2012/13
Ward Location: Not Applicable Author(s) and Contact Phone Number(s):
Phil Butlin - Executive Head of Finance (ext 4949)
Matthew Wallbridge, Head of Improvement and Delivery (ext 5147)
Area Served: Borough-wide Executive Councillor:
Cllr John Drage, Executive Member for Finance and Efficiency
Key Decision Report
Summary
The purpose of this report is to set out the overall policy and financial context for the Council’s business and financial planning for 2012/13 and the following two years. It sets out key national, regional and local policy drivers and the overall continuing financial pressures that the Council will need to ensure are built into its strategic plans. It marks the start of the business and financial planning round that will culminate in the Council approving the budget for 2012/13 in March 2012.
Recommendations
The Executive is recommended to:
a) Agree the business and financial planning process and timetable set out in Appendix A;
b) Note the forecast for revenue spending shown in Appendix B;
c) Note the main financial issues set out in the report and that further work is in hand to develop budget options for 2012/13; and
d) Agree to maintain the existing reserves policy of setting a minimum of 5% of general fund expenditure as a suitable level of general balances with amounts in excess of this level to be considered for use for one-off investment purposes.
1. BACKGROUND
1.1 The Council agreed a three-year budget forecast as part of the 2011/12 business and financial planning process. This report updates the forecast to begin the business and financial planning process for 2012/13 and subsequent years. As in 2011/12 the process looks forward to 2014/15 to coincide with the duration of the current administration in Sutton and with the government’s spending review cycle.
1.2 In terms of overall policy priorities the Council is committed to continuing to achieve the outcomes set out in the Council’s Corporate Plan that relate to the overarching themes of creating a borough that is safer, fairer and greener. In addition it is also committed to achieving the outcomes of its ‘smarter’ theme to transform services,
cut costs and maintain resident satisfaction. The business and financial planning process will demonstrate how the Council is going to deliver against these long term outcomes and the resources that will be available to achieve these.
2. KEY POLICY DRIVERS
2.1 In order to set the framework for the Council’s approach to business and financial planning it is important to understand the overall national and regional policy context, as well as the policy and delivery priorities for the Council in 2012/13. One of the key features of the business and budget planning environment is the level of significant change around the policy context within which the Council operates in the current and future years. The key issues which the Council will be mindful of in making plans for 2012/13 include:
• Central government policy in relation to localism and the progress of the Localism Bill which will include new opportunities for community involvement through initiatives such as the right to challenge and neighbourhood planning.
• Welfare and benefit reforms set out in the Welfare Reform Bill which aim to tackle poverty, worklessness and welfare dependency by introducing a universal credit. As part of this reform changes to housing benefit (HB) and council tax benefit (CTB) are expected. The HB changes include centralisation, introducing a cap relative to market rents and restricting eligibility depending on household composition. This may result in households being displaced from expensive areas such as central London creating additional pressure on lower cost areas such as Sutton. The intention to localise rules on CTB from 2013/14, and to reduce expenditure by 10% was announced in the comprehensive spending review. The details of this remain unclear, but local authorities may have to reduce CTB payments to some eligible claimants creating further pressure on council tax collection;
• Changes to the organisation and management of the health sector, with the establishment of GP consortia to take on health commissioning and the transfer of some public health functions to local authorities. There is a continuing emphasis on integration between health and social care, and changes to legislation, policy and practice in relation to adults and children’s social care. There will be grant funding to meet the new public health responsibilities that will pass to local authorities from 2013/14, but it is not yet possible to assess the adequacy of this;
• Subject to the passage of the Localism Bill the Housing Revenue Account self-financing arrangements will come into force from 2012-13. Under these arrangements the Council will take on additional housing debt with significant implications for capital investment plans and treasury management operations. Over the long term there will be more scope to invest in the Council’s housing stock , although short term capital funding pressures will remain;
• The increase in the number of schools becoming academies will affect the funding of local authority functions and presents new issues in relation to the provision of public services by independent organisations. Pressure on school places is likely to continue with the government’s plans for the future of capital funding for new places still not clear;
• Mayoral priorities in relation in relation to transport, housing, renewal and economic growth; and
• Sub-regional priorities in relation to expectations of more shared services.
2.2 In addition to these policy priorities the Council also needs to be mindful of the significant demographic changes that will affect Sutton over the coming period, including the increasing ageing population and demand for such services as dementia provision, changing birth rates and the increasing diversity of our local population.
2.3 The Council’s Corporate Plan sets out the long- term policy priorities for 2011/12 to 2014/15. The details below highlight the particular areas of focus for delivery for the coming year:
Theme: Safer
• Reducing crime and the fear of crime, with a particular focus on domestic violence
• Ensuring vulnerable adults and children are safeguarded with a priority on prevention, and the delivery of multi-agency approaches
• Ensuring there are adequate measures to assure quality and value for money in the management of safeguarding for adults and children
Theme: Fairer
• Targeting improved educational attainment for those most in need
• Developing a multi-agency family help programme
• Accelerating delivery of personalised adult services
• Progressing the delivery of integrated approaches to health and social care
• Developing new approaches to the delivery of affordable social housing that meet quality standards
• Delivering new approaches to neighbourhood planning, physical and social renewal, and growth of the local economy
Theme: Greener
• Implementing new approaches to street cleaning that provide a more tailored service to meet local needs and more active involvement of residents
• Delivering new waste collection services
• Continuing delivery of our One Planet Sutton priorities Theme: Smarter
• Completing Smarter Services Sutton reviews and implementation of options to reduce costs
• Maintaining resident satisfaction with Sutton as a place to live
• Increasing the proportion of transactions that are completed on line and using mobile telephony.
3. FINANCIAL FORECAST Government Funding
3.1 The 2011/12 grant settlement announced in December 2010 included firm figures for 2012/13 and provisional figures for 2013/14 and 2014/15. The formula grant for the current year was set at £55.257m, representing a reduction of £8.476m against
the adjusted base for 2010/11. For 2012/13 formula grant will be £49.604m representing a further reduction of £5.653m on the current year’s grant. This reduction has been factored into the forecast.
3.2 The Council has received notification of provisional allocations for a number of core grants for 2012/13. Overall the allocation has increased by £0.868m compared to 2011/12 although, in some cases there are additional responsibilities that have to be funded (for example in respect of flood prevention). The Council has also been notified of NHS funding in support of social care totalling £1.899m in 2012/13 the use of which will be agreed with the PCT. This represents a reduction over the equivalent funding in 2011/12 which is £1.975m. Further funding will be available through the New Homes Bonus and local authorities will receive notification of amounts later this year.
Pay and Prices
3.3 Service Groups’ 2012/13 base budgets are currently in and are prepared on a cash basis so provision for pay and price increases for the period November 2010 to March 2012 will be required.
3.4 The current forecast is based on an assumption of 1% price inflation during 2011/12 and no increase in pay. In 2012/13 and later years there is a flat rate 2%
provision for inflation. This is in line with the government’s inflation target of 2% for the consumer price index (CPI), although it is notable that CPI currently stands at 4.5% and the retail price index (RPI) is at 5.2% (May 2011 figures).
3.5 In respect of pay, government policy is for a pay freeze for two years from April 2011. Median public sector settlements are currently zero and, while it is not yet clear how long this situation will be sustained, the current assessment is that the requirement for 2012/13 is likely to be below the 2% provision.
3.6 On general price inflation monitoring of CPI and RPI will continue, although these are not particularly good indicators of actual price inflation on goods and services purchased by local authorities. In many cases the Council is purchasing services where the major component of the costs incurred by the supplier is for labour (e.g.
for social care) so there are reasons to expect that inflation will be lower than CPI or RPI. In most cases contracts do not provide for automatic price increases. The general inflation provision is also applied to income budgets and therefore fees and charges are expected to rise in line with this on average.
Savings
3.7 The Council’s strategic approach to delivering the necessary cost reduction is through the Smarter Services Sutton Programme. The programme’s aim is to transform Council services to provide value for money to customers by delivering services at significantly reduced costs while maintaining resident satisfaction. Cost reduction targets are agreed for each review and are around 25% of the net budget.
The budget forecast is based on assumed levels of savings from the programme of
£5.6m in 2011/12 and a further £7.5m in 2012/13, £9.9m in 2013/14 and £10.5m in 2014/15. These targets are challenging but the experience so far is that they are achievable. The progress of the programme is kept under constant review and the delivery of the savings is closely monitored. There is scope for bringing forward some of the savings by accelerating the implementation phase of the reviews. This would help to address the deficit in 2012/13.
3.8 The Council is also reviewing staff terms and conditions across the Council to modernise the current system, ensure fairness and consistency and to achieve additional savings.
Growth and Investment
3.9 The budget forecast allows for £3.5m of growth each year to address cost pressures, new responsibilities or to allow investment in policy priorities. If growth and new investment can be contained within a lower figure then this will contribute to meeting the current estimated deficit in 2012/13. This will be an intended part of the business planning process.
3.10 The allocation of resources towards policy-led investment will also form part of the preparation of Group Delivery Plans.
Council Tax
3.11 The budget forecast is based on an unchanged level of council tax. In 2011/12 council tax was frozen, as the government provided grant funding equivalent to an increase of 2.5% (£2.1m). No further support from government to limit council tax increases is expected in future years. The capping powers that have been used in recent years are likely to have been removed by the time the council tax is set for 2012/13, to be replaced, under the Localism Bill, by a provision for a local referendum to be held if any increase exceeds a level to be set by the Secretary of State. It is expected that this will, in practice, set an upper limit for increases.
Members will need to give consideration to the merits of a moderate increase in council tax as a way of bridging the budget deficit gap in 2012/13 as part of this planning process.
Reserves and Balances
3.12 The Council’s existing policy is that the level of balances should be set at a minimum of 5% of the Council’s net general fund expenditure requirement.
Provisional outturn figures for 2010/11 show a general fund balance of £7.549m which meets this minimum level. The forecast for 2011/12 is for a lower level of general fund net expenditure, so this level of balances will continue to meet the policy. Any excess over minimum prudent levels could be used for one-off expenditure such as pump-priming investment or capital as opportunities arise linked to the Council’s priorities and plans.
3.13 Further related reserves of nearly £19m are held which are mainly earmarked to meet future liabilities in respect of redundancy costs, insurance, the capital programme, supporting innovation and the Smarter Services Sutton programme.
3.14 The level of balances held also affects the Council’s borrowing and investment requirements and net interest earnings. These are monitored as part of the Treasury Management Strategy. The impact of expected changes in levels of cash balances and projected interest earnings will be factored into the budget process as it continues during the year.
3.15 The general balance on the Housing Revenue Account remains relatively low at
£326k. The approved budget for 2011/12 plans an increase in the working balance to £926k and a medium term aim to increase the balances to a more prudent 5% of turnover (about £1.5m at current turnover levels).
Capital Programme
3.16 The position on the capital programme remains difficult because of the limited resources available and the considerable need and uncertainty of funding around education capital and around Decent Homes funding for housing investment.
3.17 Resources for the programme include disposal proceeds from selling surplus sites.
The amount realised is dependent on the state of the housing market which remains relatively stagnant. The programme assumes a substantial reduction in
proceeds compared with previous valuations. This assumption will be reviewed during the development of proposals for 2012/13.
3.18 Key priorities for the capital programme include the redevelopment of Westcroft Leisure Centre and, subject to the full business case, the Smarter Working programme which is planned to deliver revenue savings by releasing a number of office buildings and relocating most Council staff to the Civic Offices.
3.19 The Council has been allocated capital grant totalling £8.7m in 2011/12 for education, but the 2012/13 allocation is not yet known. Although the James Review of schools capital has been completed the government has not yet given any indication of 2012/13 allocations.
3.20 The Council has been provisionally allocated £62.420m of Decent Homes funding over the four years from the current year. The 2011/12 allocation of £8m is being funded by supported borrowing. Funding for 2012/13 (£14m) will be via a reduction in the amount of debt the Council will have to take under as part of the implementation of HRA self-financing. For the following two years the indicative funding of £40.420m is expected to be capital grant, but these amounts are not guaranteed and must be regarded as at risk. Although there is a capital surplus over the 30 year period of the HRA business plan there is a deficit over the first ten years, even assuming that this decent homes funding is received in full. Further details are set out in the concurrent report on the HRA business plan at this meeting of the Executive. Options to manage the short term capital deficit are being developed.
Key Risks and Mitigation
3.21 The key budget risks and possible mitigation at this stage are:
• Inflation – price inflation is running ahead of assumptions, but is expected to peak and fall back towards the government’s target of 2% in 2012. The outlook for pay inflation is more is more difficult to predict, but in the short term is expected to be low.
• Grant funding – in relation to revenue funding the risk of further reductions in formula grant for 2012/13 is assessed as low but risks are higher in 2013/14 and 2014/15. There may also be further reductions in specific grant funding although the significance of these is now much reduced as many of the previously separate specific grants are now rolled into formula grant. There is more uncertainty in relation to capital grants especially on education where the government’s response to the James review is still awaited and on housing where the 2013/14 and 2014/15 decent homes allocations are at risk.
• Cost pressures – where cost pressures were identified during 2010/11 additional budget provision has been made for 2011/12. These mainly related to children’s social care and shortfalls in various income streams. Budget monitoring during 2011/12 will focus on assessing whether there are any residual pressures. There will be a further increase in Landfill Tax for 2012/13.
At this stage it is expected that all these pressures can be contained well within the £3.5m provided in the forecast for growth.
Summary
3.22 Overall the current forecast is for a £5.6m funding gap in 2012/13. The options to close this gap are:
• To examine the scope for early implementation of Smarter Service Sutton reviews. In most cases the base assumption is that savings will be achieved in full 12 months after the completion of the review, with no savings assumed
before that. In practice it is often possible to implement options more quickly than this with a part-year saving in the first year. It is not intended to shorten the period required to complete the review process itself. It should be noted that bringing forward savings in this way does not increase savings over the three year period, but the largest gap occurs in 2012/13 and so there is benefit in making savings earlier where possible;
• To develop other savings proposals;
• To contain expenditure growth and policy led investment within the £3.5m allowed in each year in the current forecasts; and
• To consider a modest increase in Council Tax.
3.23 The forecasts for 2013/14 and 2014/15 show a net surplus of £0.9m in 2013/14 compared to 2012/13. This means that the cumulative position over the three years to 2014/15 is a gap of £4.7m compared to the 2011/12 base position.
4. BUSINESS PLANNING AND BUDGET PROCESS
4.1 The Council has adopted an integrated approach to business and budget planning.
Guidance will be issued to assist staff in drawing together Group Delivery Plans that show the key deliverables for the year along with the resources that are required for delivery. The guidance issued to staff will also make clear that the people implications of proposed Delivery Plans will need to be given early consideration as part of the business and financial planning process. To this end Human Resources colleagues will meet with each Group during the period of preparation of Delivery Plans to review the people and organisational development implications of what is being proposed. Human Resources will prepare a short overview report so that the Corporate Management Team has clear oversight of people and organisational development issues and can advise members accordingly. The Delivery Plans will also contain updated risk analysis as part of the integrated process. The resulting Delivery Plans will therefore be consistent with the policy and delivery priorities set out in paragraph 2.2 and highlight those particular areas of focus for the coming year. Groups will identify where their work contributes to the Council’s equality and One Planet Sutton objectives.
4.2 Residents will be consulted on the budget proposals from November 2011 and it is proposed that the Strategic Director - Resources agrees the details of the consultation plans with the Deputy Leader and Executive member for Finance and Efficiency.
4.3 The business and financial planning timetable is attached at Appendix A. The final business and budget plans will be approved by Full Council in March 2012.
4.4 This integrated approach will mean that the Council achieves:
• a clear timetable and project plan including dependencies for the planning cycles;
• enhanced flow and quality of financial information to managers, ensuring clearer grasp of the financial landscape;
• continuing alignment of Group business finance, planning and performance processes;
• focus on Group deliverables and accountability for business performance, evidenced through measures and targets; and
• alignment of resources to business group budgets, providing the Council with a robust basis to manage resources.
5. FINANCIAL IMPLICATIONS 5.1 Covered in the report.
6. INFLUENCE OF THE COUNCIL’S CORE VALUES
6.1 Decisions on the annual budget and medium term financial plans facilitate the delivery of the Council’s objectives through the Corporate Plan within the context of its core values and key priorities.
7. EQUALITY IMPACT ASSESSMENT
7.1 There are a number of ways in which the business and financial planning process need to be tailored and assessed against the Council’s equality and diversity priorities. First, the Guidance will ask Groups to identify how their key draft deliverables contribute to the Council’s equality and diversity priorities in the Group Delivery Plans; second the final proposals will be assessed as a whole to consider the equalities impact to ensure there are no unintended consequences and the impacts on groups with protected characteristics are considered.
8. BACKGROUND PAPERS
8.1 Corporate Plan and Budget papers; Report to the Executive 14 February 2011/Full Council 7 March 2011
9. APPENDICES
Appendix A- Business and Financial Planning 2012/13 to 2014/15 – Timetable Appendix B- Gross Budget Trail
