Meeting documents

Councillor Mordue

Cabinet Member for Finance, Resources and Compliance

 

To consider the attached report.

 

Contact Officer:  Andrew Small (01296) 585507

(a)          Decision(s)

 

That, for the purposes of scrutiny, approval be given to the following initial set of (draft) budget proposals, together with the Medium Term Financial Plan:-

 

(1)  That 2.2 million of savings as set out in paragraph 4.6 of the Cabinet report be taken into budget planning.

 

(2)  That Council Tax be increased by an annual amount equal to £5 (3.59%) for a Band D property (equivalent to 10 pence per week) from 1 April, 2017.

 

(3)  That work be continued on the development of the budget proposals and that any net variance be either added to, or deducted from, General Balances.

 

(4)  That the revised list of fees and charges attached to the Cabinet report be agreed.

 

(5)  That the Band D Special Expenses charge for 2017/18 be held at the current level.

 

(b)          Reason(s) for Decision(s)

 

The Council is statutorily required to set a budget for 2017/2018 and plan for expenditure in subsequent years based upon the Medium Term Financial Plan.  These are draft proposals based upon the latest information which will be reviewed as further information becomes available and which will facilitate scrutiny of the overall strategy.

 

(c)        Alternative Options Considered

 

The development of the initial proposals has involved a number of key elements of choice as set out in previous reports and the latest report submitted to Cabinet.

 

(d)       Relevant Scrutiny Committee

 

Finance and Services.  That Committee will be considering Cabinet’s initial proposals at its meeting on 9 January, 2017.  Cabinet will then formulate firm proposals, taking account of the views expressed by the Scrutiny Committee, which will be submitted to Council for consideration.

 

(e)        Conflicts of Interest / Dispensation(s)

 

None.

 

 

The report to Cabinet on 8 November, 2016, had explained the context for 2017/18 budget planning and had highlighted the difficulties created by a number of high value factors, the greatest of which being those associated with retained business rates, further reductions in Government Grant and new homes bonus.  The report now before Members sought to bring together those elements that could be predicted with some certainty and proposed a strategy for dealing with those which were difficult to forecast.

 

Work would continue on refining the elements of uncertainty between this meeting and consideration of Cabinet’s final budget proposals in January, 2017.  This would be informed by any views that might be expressed by the Finance and Services Scrutiny Committee, the latest projected position on business rate growth and the initial proposed grant numbers, expected to be announced by the Government in mid to late December.

 

Because of the greater than usual number of uncertainties, it was appreciated that there would be a greater chance of amendments being required to the proposals to be submitted to Cabinet in January, 2017.

 

As had been set out in the November Cabinet report, the approach adopted for setting the budget for 2017/18 was similar to that followed in previous years and relied primarily on capitalising the savings delivered via reorganisation, income generation and restructuring during 2015/16 and 2016/17.

 

Since the prospect of greatly reduced Government Grant had first been mooted in 2010/11, the Council had devoted considerable effort and resources to identifying and delivering a smaller net budget requirement.  This had been achieved by the Council reconsidering what it did, what it could do and who should pay for the services provided.  This work had been badged "Commercial AVDC".

 

This had not specifically been about income generation but had instead involved a review of what customers want and need, who was best placed to provide those services, the most efficient and effective way of delivery, who should pay for the service and how much, and potentially for some services, whether they needed to be provided at all.

 

The work over the past twelve months in recognition of the forecast financial pressures had delivered significant savings, and many of these were already accruing in the current financial year.  This work had been carried out with the expectation that these transformational and efficiency measures would replace the need for a crude annual cuts exercise.  This planned response to budget reductions represented a cornerstone of the budget development process.

 

The Council was currently undertaking a full structural review and assessment centre process in order to shape the future organisation.  It was expected that the rationalisation of Council involving the removal of duplication, the breaking down of departmental silos and the reductions in unnecessary layers would deliver significant savings across the medium term planning period.  However, as some of these revisions were currently subject to a statutory consultation process, it was not possible at this stage to indicate specifically what these savings represented.

 

In some areas it had been necessary to give an indicative view of the savings likely to accrue from the rationalisation, based upon the initial work undertaken.  Because of the added uncertainty created by this approach, a higher contingent provision had been included in the budget proposals for 2017/18.

In addition to the major transformation exercises, a number of other savings had been generated as a result of service managers reviewing budgets for efficiencies and taking the chance to restructure as and when the opportunities presented themselves through natural staff turnover.  A schedule of the significant savings to be incorporated into budget planning had been appended to the Cabinet report.

 

Some expected pressures relating to 2017/18 had been identified in the Medium Term Financial Plan (MTFP) back in February, 2016.  The assumptions which had determined the sums to be provided for had been reconsidered and new pressures had been identified.  The revised sums had also been appended to the Cabinet report.

 

A number of new spending pressures had materialised since February, the main one being an expected increase in the employers pension cost contribution.  Based upon indicative numbers provided by the pension fund actuaries, it was believed that AVDC would be required to pay an additional 2%, which equated to £280,000.  Whilst the overall scheme deficit had reduced over the previous three years, the expectations over future investment performance, taking into account the uncertainty surrounding the UK economy, had led the actuaries to conclude that the employer contribution would need to increase.  At present the Council was still awaiting specific numbers and the financial model which calculated the impact of making lump sum contributions towards the scheme deficit.

 

There was a possibility that this sum could be reduced by the Council making a lump sum payment towards its overall deficit. The advance payment would be invested by the fund thereby generating income, which again reduced the deficit.  However, as mentioned above, the impact of this could not be modelled until the Council had received the necessary information from the actuaries.  The lump sum payment would be made from the new homes bonus reserve, which would be repaid annually from the savings made by not making the lower contribution into the pension fund.  It was reported that for now, the budget proposals had been prepared ignoring this opportunity, but this would be modelled and presented to Cabinet as part of the final proposals report if a valid case could be made for doing so.

 

Other pressures included:-

 

·         Increased costs relating to the HB Law legal contract where the demand on the service had been higher than anticipated in the areas of environmental health and property.

 

·         An allowance for an additional costs following the strategic finance review.

 

·         Payment of the new apprenticeship levy plus additional costs of hosting new IT servers and systems.

 

·         The business rates paid on Council owned properties, particularly car parks.

 

The total service based pressures amounted to £1.483 million, of which £463,000 represented a general provision for inflation and pay.  In respect of the latter, negotiations were yet to start.  Members would be updated as the budget process progressed.  There was also a potential pressure that had not been included for reasons of uncertainty.  This related to the Council’s asbestos liability on ex Council houses transferred to the Vale of Aylesbury Housing Trust (VAHT).  VAHT was reaching the threshold where its liability ended and AVDC became responsible for the future costs of removal.  Current indications were that the cost could potentially be as high as £300,000 per annum.  Officers were currently working closely with VAHT to assess the position and to ensure that all expenditure since the date of transfer had been properly incurred and recorded.  If, ultimately, there was a call on the Council, then the amount would be met from General Fund balances.

 

The revenue consequences of projects included within the Capital Programme (referred to elsewhere in these Minutes) were also appended to the Cabinet report on the budget proposals.

 

The Finance and Services Scrutiny Committee had at its meeting on 1 December, 2016, received a report on the Council’s future IT strategy.  When the strategy had been approved by Council, the revenue consequences would be fully scoped and built into the MTFP.

 

Members recalled that last year the Government had offered a multi year financial settlement to those councils who wished to accept it.  Along with a majority of councils countrywide, AVDC had decided to accept the offer in view of the certainty it offered.  (The Government had confirmed that the Council qualified for this offer).

 

The following table set out the elements of grant covered by the four year settlement.  Currently, only the Revenue Support Grant element had been confirmed, as the baseline funding level related to the retained benefit the Council received from the business rates it collected:-

 

	2016-17 £M	2017-18 £M	2018-19 £M	2019-20 £M
Settlement Funding Assessment	5.22	4.30	3.83	3.26
of which:
Revenue Support Grant	1.57	0.58	0.00	0.00
Baseline Funding Level	3.65	3.72	3.83	3.95
Tariff/Top-Up	-16.16	-16.47	-16.96	-17.50
Tariff/Top-Up adjustment				-0.69

 

The amount of business rates collectable from 1 April, 2016, was presently uncertain as the first national revaluation of business rates would come into effect on that date.  The revaluation exercise was intended to be neutral across the country as a whole, and in order to achieve this, the Government would need to redistribute the gains and losses experienced at a local level.  It would achieve this by adjusting the baseline funding level.

 

The Chancellor of the Exchequer’s Autumn Statement was the precursor to the Government making detailed announcements in relation to local government funding, but the exact timing of its announcement of the finance settlement had yet to be made public.  The Government had indicated that it intended to make the announcement before the end of November, but this was still awaited.  It might well be that the detailed numbers would not be known until mid December and therefore, they could not be included within the initial budget plans.

 

However, the Government’s intention was that the impact should be neutral and any reduction in the baseline should be matched by an increase in the business rates collectable.  Therefore for the purposes of the draft budget proposals, it had been assumed that there was no impact, and the existing numbers had been used.

Whilst this assumption had been made, and in practice there was little else that could be assumed, there was complexity in the adjustment calculation which might still have an impact.  Namely, the eligibility of businesses which had experienced a change in their rates payable, to mandatory relief from business rates.  The assumption used in the initial budget proposals was that any impact would be neutral, but this was still an area of risk.

 

As with the Grant position, the business rates revaluation also clouded the position on the amount of gain the Council might expect to achieve from business rates growth within the Vale.  However, the trends that sat below the revaluation were largely expected to continue through 2017/18.

 

The Council was gaining from its retained share of the business rates growth being achieved in the Vale and was on target to deliver the £476,000 figure included in the budget for 2016/17.  Monitoring information available at the point of preparing the Cabinet report only covered the first seven months of the year, up to and including October, and much could still impact during the remaining five months, which might undermine the position.  The situation would be kept under review as the detailed budget formulation process progressed, so that the final position could be informed by the latest information available at that time.

 

By way of mitigation, the Council had created a business rates revaluation reserve alongside the introduction of business rates retention, in order to smooth any significant year on year fluctuation caused by the volatility inherent in the business rates system.  It was expected that this would enable the Council to achieve the budgeted gains from the business rates system in 2016/17 and 2017/18.

 

In 2016/17, Aylesbury Vale had entered into a business rates pooling arrangement with Bucks County Council, Bucks Fire and Rescue, Chiltern District Council and South Bucks District Council.  This arrangement, if successful, allowed these authorities to retain a greater proportion of business rates growth, by reducing the amount the Government would ordinarily capture.

 

At the halfway point through the first year of operation, the gains from the pool across the whole pooling area amounted to approximately £1.4 million.  It was expected that this would decrease (as was usually the case), but there should still be tangible gains for AVDC at the end of the year.  For indicative purposes, if the current position was replicated at the year end, then the gain for AVDC would be slightly in excess of £300,000.

 

No account had been taken of any anticipated gain in the draft budget proposals, but given the uncertainty which existed in other areas, it was considered that not to do so represented a prudent position for now.  The pool created would continue to operate until and if any of the organisations that were a party to it, notified the Government that they wished to exit from the arrangement.  For 2017/18, all parties had agreed to continue on the same basis, subject to seeing the final Government numbers contained in the finance settlement.

 

Should any of the parties become unhappy with the position contained within the settlement, they would have a window of 28 days to withdraw (from the date of the settlement being published).  Such a decision by any of the parties would result in the pool being disbanded.

 

The Council had been using its cash balances over the past few years in lieu of long term borrowing.  This delivered an advantage over lending returns whilst base rates remained low.  The financial advantage in terms of lower borrowing costs had been factored into the initial budget proposals.

 

As had been identified last year, the on-going low bank base rate was creating financial pressure.  Since 2010, the shortfall in investment earnings, which had arisen from the record low base rate, had been smoothed via the use of the interest equalisation reserve.  This reserve had been created from excess interest earnings in times when the base rate had been considerably higher than it was at present.  The reserve had been used effectively over the past few years to smooth the budget pressure created by the lower interest rates, in the realistic expectation that rates would recover.

 

In August, the bank base rate had been cut to 0.25%, which had increased the pressure on investment returns.  Interest rates were not expected to rise until 2018 at the earliest and it appeared that the Council would need to make use of the interest equalisation reserve again.  Therefore as part of this year’s budget planning exercise it was proposed to make a contribution of £80,000 from the reserve in 2017/18.

 

In last year’s spending review the Chancellor of the Exchequer had signalled his intention to review the operation and distribution of new homes bonus (NHB).  This had been followed up with the publication of a consultation paper.  The consultation proposed both a reduction in the benefit by reducing the time it was payable and a sharpening of the scheme’s focus.  It was reported that there was some speculation within the local government community that the extent of the Government’s likely changes could be more far reaching than had been suggested in the consultation document.  The consultation had sought views on the following:-

 

·         Limiting the benefit from six to four years, or even possibly to two years.

 

·         Reducing or removing the bonus on developments initially rejected by councils.

 

·         Reducing or removing the bonus from those councils without a local plan.

 

·         Setting an element of targeted growth.

 

·         Transitional protection for those councils impacted by the greatest amounts.

 

The Government’s stated intention was to reduce the amount of NHB payable.  Consequently, as the District receiving the greatest amount of NHB, all of the proposals had a proportionately greater impact on this Council.  The modelling accompanying the consultation projected allocations to this Council dropping away significantly from current levels.

 

Given the uncertainty surrounding its future, this Council had agreed not to increase the contribution from NHB into the revenue budget.  The consultation had closed on 10 March, 2016, and as yet no formal response had been published by the Government.  Because of its significance to many councils, it was expected that the Government would include its response within the finance settlement which was imminent.

 

Many councils relied heavily on NHB to balance their revenue budgets and so it was expected that the Government was unlikely to make any significant changes to the modelled allocations contained within the consultation document and the spending power measures included in last year's finance settlement data.  However, as mentioned above the changes could be more far reaching than had been anticipated.

 

Reflecting this, the initial budget proposals contained unaltered assumptions in terms of NHB during the MTFP period.  Once the finance settlement data had been released the assumptions would be re-tested and any changes required would be reported back to Cabinet (and Scrutiny, if timing permitted), as part of the consideration of final budget proposals.

 

Following the publication of the Government’s consultation response, Cabinet would need to review the on-going policy in relation to how the Council used the amounts it received.  For example, should the Council continue to take the same amounts into revenue and should it allocate the same proportion to Parishes?  However, Cabinet could not reasonably do this until after the Government had published its final consultation response.  The Parish scheme was currently being held in abeyance pending the outcome of the Government’s review.

 

The AVE Business Plan for 2017/18 was currently being developed as referred to elsewhere in these Minutes.  Dividend payments had been forecast within the developing central version of the AVE Business Plan for 2017/18 and these had been reflected in the initial budget proposals.  The Plan also included a worst case scenario (excluding a dividend payment).  This had been recognised as a budgetary risk and account had been taken of this also in determining the appropriate level of working balances to be held this year.  As indicated later during the meeting, when considering the Business Plan, Members agreed some specific monitoring arrangements to ensure that the performance targets were being met, or if not, the reasons why.

 

The Government had yet to announce its policy on council tax increases (to be contained within the finance settlement), but it had been signalled that a threshold was still likely to apply at the same level as had been introduced for this year.  The national policy had now shifted away from the desire to see council tax levels frozen, to an acceptance of minimal tax increases.  Contained within last year’s settlement was an assumption that each council would increase its council tax by the maximum permissible amount, short of requiring a referendum.

 

Consequently, the Government had reduced the amount of Grant it intended to award each council by an equivalent amount.  Therefore any council not increasing their council tax by the assumed amount would, effectively be worse off than the Government intended.  The maximum allowable increase had also been flexed last year for certain types of councils, with an additional 2% above the existing 1.99% being made available to councils with responsibility for adult social care.  Further flexibility had also been given to district councils, thereby acknowledging the huge disparity in individual levels of council tax and consequently the maximum gain achievable by a percentage increase.  For district councils, the maximum increase had been changed to 1.99% or £5, whichever was the greater.

 

It was noted that in allocating Grant reductions in the four year settlement, the Government had assumed that each qualifying council would take maximum advantage of this additional council tax increase threshold and had reduced Grant by an additional amount equivalent to the extra council tax it expected councils to generate.  Implicit within this was a new Government assumption that more of the burden of funding council services would be transferred to the tax payer.  Any council not wishing to pass this on to the taxpayer would consequently be worse off, as the Government would have reduced their Grant, assuming that they had.

 

Given this, the initial budget proposals included the assumed maximum that the £5 increase would be adopted in order to ensure that the Council was no worse off than the Government had assumed.  A £5 increase at Band D would represent a 3.59% increase, equivalent to just under ten pence per week, and would increase the Band D council tax for Aylesbury Vale District Council to £144. 06.

 

Since the Government’s austerity programme had begun the reduction in Government Grant support had been equal to £105 per resident.  Against this backdrop, it would be unreasonable for residents to continue to expect to receive the same services without something changing, such as the level of tax paid or the ability of the Council to generate new income through other means.

 

Earmarked reserves represented the prudent saving of sums against the recognition of future financial events which, if not prepared for, would be difficult to deal with at the point they occurred.  Earmarked reserves were an essential part of sound financial planning.  As part of the budget development process for 2017/18, the Cabinet Member for Finance, Resources and Compliance was undertaking a full review of the Council’s reserves and provisions.

 

With the national focus on the reduction in resources and continuing media interest, it was unfortunate that the Council’s earmarked reserves position had shown a considerable leap, as this belied the reality of the situation that the Council was actually facing.  The principal explanation behind the increase was the sizeable amounts of NHB still being received by the Council on the back of the significant housing growth in the Vale and the difficulty in delivering infrastructure schemes in a short timeframe.  The consequence of this was the ring fencing of these sums in reserves pending the delivery of schemes. 

 

The vast majority of reserves held were for legitimate reasons and the balances were considered reasonable given a fair assessment of the budgetary pressures that they were being held against.  The size of the reserves and the different time spans over which they would be required presented an opportunity to mitigate some of the increase in the Pension Fund contributions (referred to elsewhere in this Minute).  This would be explored as soon as detailed modelling was made available.

 

The total balance held in reserves was expected to dip significantly over the next two years as the pressures against which they were being held materialised, and the infrastructure schemes for which the NHB funds were held, were delivered.  Where the revenue budget was dependent on the use of funding from reserves, reliance was being reduced to the point where the budget was deemed to be sustainable.

 

Attached to the Cabinet report was a schedule of those fees and charges that had been reviewed as part of the budget process and which it was proposed to make changes.

 

The Council held general working balances as insurance against unexpected financial events.  This included failure to generate expected income as well as financial claims against the Council.  The current minimum assessed level of balances was £2.5 million which had been arrived at based upon a risk and probability assessment of potential budgetary factors during 2017/18.

 

Whilst the Government’s four year settlement was a factor that might justify a reduction in this level of balances, it remained unchanged on the previous year, which was a reflection of the considerable uncertainty surrounding the impact of the Government’s changes to the Grant numbers and the impacts of business rates revaluation, together with the numerous other issues identified within this Minute.

 

The September quarterly digest had projected a net contribution from balances of £238,000.  This was made up of additional income/savings of £868,000, offset by a contribution to a new reserve of £1,106,000 to meet the costs of the commercial AVDC programme.  Current indications were that working balances might end 2016/17 at around £3.6 million which was above the assessed minimum level.

 

The holding of excess balances presented the Council with opportunities to offset the upfront costs of change initiatives that would pay back and deliver on-going savings in later years.  One such example was the funding during the current year of the commercial AVDC programme.  It was expected that the change programme would continue to deliver efficiencies in the organisation.  These efficiencies, some of which had already been included within the initial budget proposals, would contribute towards balancing the budgets in future years.

 

In accordance with good practice, the Council recorded and considered the significant risks it believed existed as an organisation which might hinder, or indeed prevent the Council, from delivering its statutory duties or core objectives.  These risks were captured within the Council’s risk register, together with mitigating factors.  The risk register was reviewed regularly by the Audit Committee.

 

At its last meeting the Committee had commented on the value of this document and recommended that it be reviewed also by Cabinet as part of the budgetary process.  Accordingly, the Cabinet report incorporated a copy of the document which had been included in the part of the confidential agenda.  Members had noted the contents.

 

The Council’s approach to balancing its finances over the MTFP was contained within the commercial AVDC programme.  This could be summarised as follows:-

 

·         Initiated in 2015 to manage the process of balancing the budget in the run up to a predicted total loss of Government Grant.

 

·         The adoption of a two pronged approach of achieving savings by the consolidation of services, use of digital and reducing or eliminating duplication, whilst at the same time generating income through commercial activities.

 

·         Commercial activities being orientated around the customer, fulfilling their demands and delivering services that they wanted; being speedy in response to customer demands; and cost effective service provision at a price customers were prepared to pay.

 

The overall programme had been based on a risk management approach.  Whilst it was anticipated that the level of profit on the income generated by commercial activities would ultimately exceed the level of savings that could be made in the Council’s core operations, the actual future level of profits was nevertheless a prediction and not yet bankable.  While the activities were underway to establish likely customer demands for commercial services and the best way to fulfil them, in parallel, the Council was undertaking a major internal change programme to deliver savings which would ensure that it had the breathing space to develop the required level of profits from the commercial ventures.

 

It was the delivery of the major internal change programme which made up the majority of the savings and efficiencies shown in the Appendices to the Cabinet report.  Whilst the new income streams from the Council’s new operations were expected to make significant contributions in later years, at this stage they were developing and it was not considered sufficiently certain to build these into future years’ planning just yet.

 

The report to Cabinet in November had set out the rationale for the core assumptions used in the MTFP.  In summary, the single biggest issue remained the on-going and severe reductions in Government Grant, and the uncertainty (notably around business rates and new homes bonus) as to how these would be applied to individual councils.  The reality of continued public sector austerity through this Parliamentary term had been confirmed within the four year funding settlement.  Further, the Chancellor had announced within his Autumn statement that he expected the austerity agenda to continue into the next Parliamentary term, thereby potentially spanning six more years.

 

The MTFP was predicated on reductions in Grant at the same rate as had been experienced over the last five years through to 20121.

 

Last year the Government had introduced the concept of negative Grant and it was expected that this would become a feature of local government financing over the Council’s financial planning period.  This was consistent with the historic planning assumption that the Council had been using over the past six years and the Council’s strategy for balancing its budget had been predicated on this continuing.  In this respect, the strategy around commercialism and efficiency was considered to remain the correct strategy to deal with the financial challenges facing the Council.

 

The additional freedom around council tax increases would help to soften the challenges marginally, although new pressures, such as those associated with inflation, were likely to absorb any respite offered by them.  Because of the various factors identified in the Cabinet report, it was expected that there might be a need to make material changes in the final proposals which would be presented to Cabinet in January, 2017.  Where uncertainty existed, this had been identified, along with the assumptions and any mitigation strategy which existed.

 

Cabinet’s initial proposals would be considered by the Finance and Services Scrutiny Committee, when it was hoped that there might be some more information available.

 

Finally, it was reported that work was progressing to develop the Aylesbury Special Expenses budget.  Initial indications were that a review of costs and services charged into this area were likely to result in the tax in Aylesbury remaining frozen at its current level.

 

RESOLVED –

 

That for the purposes of scrutiny approval be given to the following initial budget proposals for 2017/18 and the Medium Term Financial Plan:-

 

(a)  That £2.2 million of savings as set out in paragraph 4.6 of the Cabinet report be taken into budget planning.

 

(b)  That council tax be increased by an annual amount equal to £5 (3.59%) for a Band D property (equivalent to less than 10 pence per week) with effect from 1 April, 2017.

 

(c)  That work be continued on the development of the budget proposals and for any net variance resulting to be either added to, or deducted from General Balances.

 

(d)  That the revised list of fees and charges shown on the schedule attached to the Cabinet report be approved.

 

(e)  That the Band D Aylesbury Special Expenses charge for 2017/18 be held at the current level.