SHEFFIELD CITY COUNCIL Chief Executive’s Directorate
REPORT TO CABINET DATE 22 October 2008
REPORT OF The Director of Corporate Resources ITEM
SUBJECT Medium Term Financial Strategy 2009-2012
SUMMARY
See separate Executive Summary
RECOMMENDATIONS
See Paragraph 14
RELEVANT SCRUTINY BOARD IF DECISION CALLED IN Not applicable FINANCIAL IMPLICATIONS Yes PARAGRAPH 14.1 CLEARED BY Eugene Walker
Revenue Budget and Capital Programme 2008/2009 – Special BACKGROUND PAPERS Council 7th March 2008
CONTACT POINT FOR ACCESS Ryan Keyworth TEL NO. 27 34386
AREA(S) AFFECTED City-wide
CATEGORY OF REPORT
OPEN
Statutory and Council Policy Checklist
Category of Report OPEN CLOSED
Financial Implications YES NO Approved by Eugene Walker
Equal Opportunities Implications YES NO
Property Implications YES NO
Area Panel(s) Affected City-wide
Environmental Sustainability YES NO
Community Safety Implications YES NO
Human Rights Implications YES NO
Relevant Scrutiny Board if decision called in
Strategic Resources and Performance
Press Release YES NO
Sheffield City Council Medium Term Financial Strategy 2009-12
Sheffield City Council Medium Term Financial Strategy Executive Summary 2009-2012
Context Sheffield City Council’s Medium Term Financial Strategy (MTFS) is impacted by national and local policy agendas and inspection regimes.
Sheffield City Council Corporate Plan The Sheffield City Council Corporate Plan for 2008 – 2011 has a number of key priorities for the City that will be addressed in this planning period. The plan is called the “City of Opportunity” and its aim is to make Sheffield a place where every individual has the opportunity to realise their potential, irrespective of their background, circumstances, or where they live.
Comprehensive Spending Review 2007 The results of the Comprehensive Spending Review were announced in November 2007. The total increases in local government funding over the period 2008/2009 to 2010/2011 are 4%, 4.4% and 4.3%, however, the increase for Sheffield is significantly lower and lower than current rates of inflation.
Area Based Grants A number of traditionally ring-fenced specific government grants have been moved into a more flexible grant regime that gives Local Authorities a greater degree of flexibility to direct funding to local priorities subject to achieving performance targets agreed with the government.
Comprehensive Performance Assessment / Comprehensive Area Assessment During the life of this MTFS, the Audit Commissions main inspection regime for Local Authorities will change. The Comprehensive Area Assessment will be a more risk based forward looking approach that will focus more on the delivery of outcomes for an area as a whole and its citizens.
Key Strategies
Income Strategy Government grant funding levels are tight for the period of the MTFS. The Council is able to levy fees and charges for a wide range of services provided to the public. Some fees are regulated, eg planning fees, whilst others are at the Council’s discretion eg parking charges. The planning assumption is that fees and charges will rise by 5% (in line with RPIX) unless set elsewhere or otherwise agreed.
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The current economic climate is also affecting the Council’s ability to raise income from some services (eg planning and building standards). Significant work will be required to bring the costs of these services in line with the income projections. A key objective of this strategy is to keep Council Tax increases to a minimum. A comprehensive income strategy for the Council will be developed in the coming period.
Expenditure Strategy The Council will face significant cost and demand pressures throughout this period. Additional investment in the proposed Highways PFI scheme will need to be secured through efficiency savings and cost (eg Energy price inflation) and demand pressures (eg social care) will = to be contained. As this strategy is being developed, the economy and global financial system is subject to unprecedented levels of volatility and uncertainty. It is likely that the UK economy will suffer a period of down-turn and that additional pressures on Council services will result. The Council will also be operating in a less stable climate in terms of fee income, capital financing arrangements and asset values. All these issues are being taken into account in the preparation of the detailed financial projections.
Key Financial Projections At this stage in the budget process, detailed financial projections are not available. Pressures and savings opportunities are being quantified and categorised as are efficiency opportunities. At this stage, a total £8.7m of pressures have been identified as Unavoidable, with further work in progress to understand and quantify recommended investments and policy choices and other pressures. A significant number of savings opportunities are also being discussed with relevant Cabinet Members. Once this work is completed and savings proposals fully developed, a further report will be brought forward for Cabinet approval before Christmas.
Key decisions recommended in the MTFS Key decisions and recommendations are made in the MTFS report. They are: Decision Detail Approve the planning 2009/10 2.0% assumptions for Council Tax 2010/11 1.5% setting detailed in section 5.2 of the main report 2011/12 1.5% 2012/13 0.0%
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Approve the revised objectives See main report for list of financial strategy as outlined in section 3.1 of the main report and consider any further objectives Approve additional investment £550k for Workstyle Project on the Outstanding Sheffield £250k for detailed business cases for Programme detailed in section Customer Services Transformation and 3.3.6 of the main report Workstyle Total £800k Approve the approach for the Categorisation 2009/10 2010/11 distribution of years two and ABG Flexible three of the Area Based Grant, Pot (including 20.08% 20.08% including Working WNF) Neighbourhoods Fund detailed in section 5.3.2 of the main Passported 69.77% 60.58% report Funding Pooled Young 10.15% 10.15% Persons ABG Employment, Enterprise and 0% 9.19% Skills Pot Total 100.00% 100.00% Approve the allocation of Approve existing allocation of Reward LPSA Reward Grant as Grant to Sheffield Safer Communities detailed in section 5.3.3 of the Partnership and consider any further main report allocations as part of a further report to Cabinet in December. Approve the treatment of the Recommendation is to leave any amount PCT contribution to Continuing above that required for the current NCC Care costs detailed in section budget unearmarked and consider it 5.5.2 of the main report alongside the wider 2009/10 general fund revenue budget.
Corporate Finance 14th October 2008
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Sheffield City Council Medium Term Financial Strategy 2009-2012
Sheffield City Council Medium Term Financial Strategy 2009-12
Sheffield City Council Medium Term Financial Strategy 2009-12 Table of Contents
1 Introduction 3 2 Process 4 3 Context 5 4 Comprehensive Performance Assessment 15 5 Income Strategy 17 6 Expenditure Strategy 29 7 Risks and Sensitivities Affecting the MTFS 32 8 Overview Financial Projections 35 9 Risks and Financial Reserves 35 10 Capital Strategy 39 11 Housing Revenue Account 42 12 Treasury Management Strategy 43 13 Governance Statements 48 14 Recommendations 49 15 Appendix – Performance Against Financial Strategy Objectives 50 16 Appendix – LPSA Performance Reward Grant 52 17 Appendix – HRA Forward Financial Projections 53 18 Appendix – Council Tax Comparisons – 2007/8 and 2008/9 54 19 Appendix – Top five income streams for each directorate 55 20 Appendix – Breakdown of Area Based Grant 2008/09 – 2010/11 56
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1 INTRODUCTION
1.1 Purpose This report sets out the Medium Term Financial Strategy and forward budget projections for the next three years including detailed revenue budget implications for 2009/10 & beyond.
1.2 Background
1.2.1 2008/9 Budget Process The 2008/9 budget process was successfully completed with Council approval on 7 March 2008.
The 2008/9 budget was set within the context of a 2.5% Council tax Increase and within a 2.6% increase in general Government grant for non- school services. Cost increases in some of the services outstripped the grant increase combined with additional demand pressures; particularly in adult and children's social care services meant that efficiencies and savings had to be found to sustain investment in priority services. The savings were a combination of specific measures, together with holding non-priority budgets at the level of the previous year. Priority services, such as social care and highways, were funded for inflation or other cost pressures.
Savings measures allowed £10.5 million to be invested back into key services to meet their cost pressures.
1.2.2 Medium Term Financial Strategy The Medium Term Financial Strategy (MTFS) details the Council’s financial projections for the next 3 years, covering all aspects of Council spend:
• Revenue
• Capital
• Housing Revenue Account
The MTFS provides detailed analysis and narrative on the Council’s financial position plus supporting information on:
• Income and Expenditure Strategy
• Service Financial Issues
• Risks and Sensitivities
• Reserves
• Borrowing and Investing
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In previous years, the components of the MTFS were covered less formally via a number of different reports, discussions and presentations. Recently, the environment in which the Council is operating is becoming more complex. There are three major initiatives in progress or just about to begin:
• Outstanding Sheffield
• Organisational Transformation Programme
• Highways PFI
Individually, these programmes have significant financial implications for the Council for a number of years to come in terms of both Revenue and Capital Expenditure. As these three programmes are taking place in parallel there is a need to bring all the different aspects of the MTFS together in one place to ensure the impact of these initiatives is fully considered.
2 PROCESS
A two year detailed budgeting approach will be adopted setting out costs and income targets for 2009/10 and 2010/11 along with indicative council tax levels. Directorates will be provided with pay inflation as this is consistent across the services. However, no inflation on costs will be provided initially recognising that actual inflation varies widely across Directorates and that the Authority needs to identify the actual service pressures and consider these as a whole to ensure resources are directed in line with priorities. It is assumed in general that fees and charges will increase by RPIX inflation prior to the formulation of a more comprehensive strategy for fees and charges.
Indicative cash allocations have been prepared for Directorates on this basis which feed into the overall projections. The overall projections include items of unavoidable expenditure and the impact of the three major initiatives above.
A two stage process is being used for 2009/2010 and 2010/2011 which begun with Directorate meetings throughout the summer to identify the cost and demand pressures facing services. These pressures have been reported to and reviewed by the Council Executive Management Team and Leadership Team. Having the Directorate meetings early enabled the Executive Management Team and Leadership Team to assess all the pressures in light of the overall financial position of the Authority and make decisions with the fullest possible information to hand. This work is still in progress at the time of writing.
This version of the Medium Term Financial Strategy focuses on strategic issues and does not contain detailed financials. Once the ongoing work with Members is complete, a further report to Cabinet containing detailed financial projections will be brought forward for approval. It is anticipated that this will happen before Christmas.
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The end date for the 2009/2010 process will be the Special Council on the 6th March 2009 which will approve the budget and council tax for the forthcoming year in line with statutory requirements.
3 CONTEXT
3.1 Financial Strategy and Objectives The Council has had a robust financial and service strategy for several years, which has helped to achieve a balanced budget for the last six years and secure a reasonable level of available reserves.
The aim of the Council’s Financial Strategy has been “to provide a medium term framework which will support the City Council in building a robust, stable and integrated financial plan over the coming years, where expenditure and ways of providing services are constructively challenged and monitored to ensure that Council business is undertaken in the most effective and efficient way. The Strategy recognises and identifies the financial risks facing the Council and actively seeks to manage and mitigate them”. To achieve this, the Council set the following objectives for the Financial Strategy:
• the level of reserves should always cover a prudent estimate of the financial risk carried by the authority
• avoiding overspends
• maintaining a balanced Capital Programme and targeted priority investment from the Corporate Resource Pool (CRP)
• integration of financial and service planning, performance management and risk management
• keeping capital debt increases to a minimum
• improving Council Tax and rent collection rates
• identifying areas for improved efficiency
• getting best value from the Council’s property assets
• aiming to achieving a positive report from external audit, achieving at least 3 on Use of Resources and sustaining overall score at 4 in CPA assessment
Performance against these objectives has been reported regularly over the last few years and on the whole these objectives have been met (see Section 15). Although the aim of the Financial Strategy is still valid, the objectives require updating to reflect the current issues surrounding the
Page 5 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 authority. It is proposed that the objectives above are replaced with the following:-
• keep future Council Tax increases to a absolute minimum, subject to cost pressures, government grant settlements and political priorities
• improving Council Tax and rent collection rates
• only incur additional spending when either; matched by additional income, on an invest to save basis, or is directly aligned to the achievement of the Corporate Plan objectives.
• maximise the Councils income by developing and adopting a comprehensive charging strategy, promptly raising all monies due and using the most cost efficient methods of collection
• optimise the Councils capital financing position in terms of risks, availability of funds and returns
• the level of available reserves should aim to cover a prudent estimate of the financial risk facing the authority
• seek customer feedback on services they are prepared to pay for and at what level, including council tax
• ensure sustainable and balanced revenue budgets and capital programmes are set where the available resources are aligned to satisfy the Authority’s objectives
• achieve a positive report from external audit and maintain a score of at least 3 on Use of Resources in the new Comprehensive Area Assessment framework
• integrate financial and service planning, performance management and risk management
3.2 National Priorities A range of external factors influence the Council’s MTFS.
3.2.1 CSR ‘07 The results of the Comprehensive Spending Review were announced in November 2007 and resulted in a plan of spend for the next three years. As well as announcements on the level of formula grant for the next three years the plan gave the allocations for 61 specific grants. The total increases in local government funding over the period of the plan 2008/2009 to 2010/2011 are 4%, 4.4% and 4.3%, however, the increase for Sheffield is significantly lower. Although we have been given a three year settlement which provides stability and the predictability of funding to plan ahead, the settlement is very tight.
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3.2.2 Efficiency Targets and Reporting During the period of the Comprehensive Spending Review there will be no mandatory targets for efficiency for individual authorities. However the efficiency agenda is being pursued under the new performance framework for local authority partnerships produced by Communities and Local Government (CLG). A new national indicator covers Value for Money (NI 179). Whilst councils will no longer be reporting the detail formerly required in the Annual Efficiency Statement, this indicator still requires authorities to have in place processes to record the value of on going cash releasing value for money gains.
Further proposals are also under discussion, which include value for money information in statutory leaflets which accompany Council Tax demands. The exact format and content of this information, and hence the impact on the Council is not yet clear.
3.2.3 CPA / CAA From April 2009 the current Comprehensive Performance Assessment (CPA) regime will be replaced by a new performance assessment framework, Comprehensive Area Assessment (CAA). CAA will be a more risk based forward looking approach that will focus more on the delivery of outcomes for an area as a whole and its citizens. Rather than concentrate on the performance of an individual authority, CAA will look across Authorities, Health Bodies, Police, and Fire etc. which are increasingly expected to work in partnership. The Use of Resources judgements will continue, but the scope will be widened to cover issues such as commissioning and the sustainable use of resources (see Section 4 for more information).
3.2.4 Area Based Grants From 2008/09, Central Government is providing authorities with a new non- ringfenced general grant known as the Area Based Grant (ABG). This funding stream is made up of grant streams that were previously provided as specific grants, which have now been augmented and are now available to enable the council and its partners to deliver local priorities. As part of the Comprehensive Spending Plan the allocation of this funding is known until 2010/2011. Included within this funding stream is the Working Neighbourhoods Fund (WNF) (see Section 5.3.2).
3.2.5 Partnership Working Local authorities are now charged with much wider powers than previously, for example, community safety and the duty to promote health and well being. These responsibilities can not be delivered by the authority alone and require the use of partnership working. Partnership working ensures a wide range of organisations work together to achieve the necessary outcomes. In terms of achieving the necessary outcomes for the citizens of Sheffield partnership working with other bodies such as Health, Police, Voluntary Sector and Local Businesses etc. is required. There is an
Page 7 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 increasing emphasis on partnership working and focusing on outcomes with such initiatives as the area based grant to assist.
The Sheffield First Partnership, which is Sheffield’s Local Strategic Partnership linked to the Local Area Agreement, brings together all the large public sector providers, the education providers, business representatives, faith, community and voluntary sector groups and regeneration agencies. The overall plan for the city is called the City Strategy.
3.3 Local Priorities
3.3.1 Administration Priorities The Administration has the following Values and Key Themes that will form the basis of Council policy development in the medium term.
The Values are:
• Sheffield - where everyone matters – individuals not postcodes
• Fairness for all – equality of opportunity
• Empowerment - people a real part of decision-making with devolution from Town Hall to community assemblies to allow local people to set standards for local Council services
• Transparency and accountability – decisions increasingly taken in public
The key themes are:
• Environment - at the heart of policies and practices.
• Educational Attainment - the key to people fulfilling their potential
• Safer City - investment in what works and engaging the community
• Value for Taxpayers’ Money - modernisation of services and tight grip on costs of bureaucracy
• Devolution – communities empowered to make real change to their area
3.3.2 Sheffield City Council Corporate Plan for 2008 – 2011
The Sheffield City Council Corporate Plan for 2008 – 2011 has the following key priorities for the City that will be addressed in this planning period. The plan is called the “City of Opportunity” and its aim is to make Sheffield a
Page 8 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 place where every individual has the opportunity to realise their potential, irrespective of their background, circumstances, or whereabouts they live.
Safer, Sustainable Communities – Ensuring that all communities have a voice and are sustainable and safe. Further reducing anti-social behaviour and crime and ensuring the supply of good quality, sustainable and affordable houses are crucial to achieve this. The establishment of Community Assemblies will amongst other things allow opportunities for all residents to engage and influence the issues that affect their lives.
Protecting the Environment – The Council is committed to improving the environment and can assist residents to improve their local area and reduce their carbon footprint by providing better recycling facilities, ensuring streets are safe, clean and congestion free, enhancing and protecting parks and open spaces and encouraging sustainable transport and development.
Leading Sheffield’s Transformation – Sheffield’s economy has been through an economic revival over the last ten years as well as the physical regeneration of the city. This transformation needs to continue and we need to ensure the city has the skills, jobs and sectors it needs to compete in future economies.
Healthy and Independent People – We aim to provide excellent social care and health services that meet the needs of all residents and help them lead healthy and independent lives, ensuring that everyone, especially the vulnerable are treated with dignity and respect.
A Better Life for Children and Young People – Children and young people are the future of the city and the Council needs to do all it can to enable all to reach their full potential. This includes raising levels of educational attainment and promoting higher aspirations, improving children’s health, safety and happiness and ensuring a successful transition to adulthood.
Putting the Customer First and Getting Better Value for Money – In designing and delivering services the customer will be put first, providing services that customers want, when they want it and in what ways they want to receive it. The creation of Community Assemblies will enable residents to be involved in the planning and delivery of services.
These City priorities form the basis for the financial and service planning for the period of this strategy. Further details can be found in the full Corporate Plan on the Council’s Internet site.
3.3.3 Highways PFI Improving the quality of the roads and street lighting is vital to supporting the continued regeneration of the City and to improving performance and satisfaction for the highways services.
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The Government has approved the Council’s bid for a PFI scheme and has awarded PFI Credits of £663.8m for a project to improve all of the City’s roads and street lighting. The PFI arrangement will cover the entire highways network in Sheffield, and will include upgrading and future maintenance of roads, pavements, streetlights, signs, traffic lights, bridges and trees.
The £663.8m PFI Credits include the £79.3m announced in 2007 for a Street Lighting PFI scheme. The two projects will now be carried out together to achieve the best value for money.
As approved at Cabinet on the 10th September 2008 this key strategic investment in the City’s roads will require the Council to commit amounts equivalent to the 2007/08 transport and highways annual budgets of £27.1m and also to commit additional Council resources of £9.634m, all at 2007/08 prices, and for the 25 years from the start of the contract. This amount will be subject to annual inflation increases at mid-year RPIX, except for energy costs which will be a pass-through with the price risk remaining with the Council.
Inflation in the year to September 2008, measured by RPIX, is estimated at 5.5%. Assuming forecast inflation of 3.5% by September 2009, and then a fall to 2.5% by September 2010 and thereafter, the full-year Council contribution level at the start of the contract will be £42.1m. During the contract, a 1% increase in inflation above the forecast rate of 2.5% would increase the additional resource requirement by £0.4m a year at current prices.
The PFI grant of £663.8m will be payable by way of Special Grant on an annuity basis over 25 years at an amount of £49.5m per annum. The way in which the Government pays PFI credits results in substantial cash balances attributable to the project in its early years. As with other PFI projects, the Council will invest those surplus cash balances, crediting 3.5% interest to the project and retaining any interest earned above this level for use elsewhere within the Council. Without this allocation of interest, it would be necessary for the £9.634m additional annual contribution (at 2007/08 prices) to be increased by around £1m.
As with previous PFI schemes, the procurement costs, which are estimated at £9.3m, will be funded from existing PFI cash reserves and paid back with interest over the contract period. In the unlikely event of the project not proceeding, procurement costs would need to be paid back to the PFI reserve. If the project were halted at OBC-approval stage, there would be costs of around £4m to recover and, should the project reach an advanced stage and be called off, it is estimated that costs of around £8m could have been incurred. To repay £8m with interest over, say, 16 years, would cost around £0.6m pa at current prices.
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3.3.4 Organisational Transformation Programme The council’s Organisational Transformation Programme (OTP) has been in operation since 2006/07 and its objectives include improving the effectiveness and consistency of support services across the Council, putting customers at the heart of service delivery whilst creating financial savings that will allow us to fund our future improvements.
The detailed financial projections, which will be produced shortly, will assume that the OTP is successful and that it is able to deliver the following contributions to the Revenue Budget:
• 2009/10 £3.5m
• 20010/11 £6.0m
• 2011/12 and beyond £8.0m
The OTP projects and funding were agreed as part of the Budget Report to Council in March 2007, which included establishing an invest to save fund to facilitate the necessary transformations. An update on both the OTP projects and the invest to save fund was provided within the Budget Report in March 2008.
OTP includes projects which will deliver transformed services in the following areas – finance, ICT, procurement, legal and governance, communications, customer services and Organisational Development. The programme also includes the Outstanding Sheffield Programme (see 3.3.6), Workstyle and Document Management projects.
Since its beginning OTP has already delivered:
• a new finance system for the council (Oracle Enterprise One);
• the migration of the elections service to Customer Services;
• the HR First service;
• significant contract savings through the procurement project.
3.3.5 Service and Finance Reviews A series of Service and Financial Reviews are planned for the coming period. These reviews are designed to address issues identified within service areas that require significant service redesign. The initial driver for a review can be any combination of the needs to:
• improve customer service
• improve performance
• reduce costs
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3.3.6 Outstanding Sheffield Programme The Outstanding Sheffield Programme (OSP) has been established to procure a managed service contract, to replace services that are currently delivered, through contracts with Liberata and Affiniti, which expire in January 2009 and October 2009 respectively, and some additional services.
The services currently provided by Liberata and Affiniti are referred to as the core services (Package 1) and include:
• Revenues & Benefits
• ICT and telephony
• Financial Business Transactions
• Payroll
The service extensions being discussed, such as HR transactional and also Property & Facilities Management Services are referred to as non core services (Package 2).
The aim of the process was to put in place a contract that would deliver significant improvements to the quality of services the Council provides to its citizens and which would also drive continuous improvement in services as well as generating savings over the term of the contract.
The contract specifies increased performance standards plus year on year efficiency gains for core services. Once the preferred bidder is known, the detailed financial implications will be accurately quantified.
It is anticipated that the preferred bidder for the package 1 services will be presented to Cabinet for approval in November 2008 and will be operational by the 5th January 2009. The package 2 preferred bidder is expected to be selected in December 2008, with service due to commence April 2009.
In addition to the core services of package 1 & 2, dialogue has taken place about the bidders’ proposals for supporting the Council in delivering Transformation. We have identified three areas where our partner could make an immediate contribution to that agenda:-
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Description Already Further Approved Approval (March 08 Required Budget) for 2008/9 Customer Customer insight work to develop £350k Services customer profiling and analysis capability including data validation – will ensure that future customer service delivery is aligned to customer needs Joint Set up and operation of a £375k Programme programme office to develop and office co-ordinate the portfolio of transformation projects across the Council. Workstyle Introduction of flexible working £100k £550k facilities to Council offices, making better use of space and ultimately reducing Council office needs. Annual savings of £450k are expected from 2010/11. Business Further detailed business cases £250 Case for Customer Services Development Transformation and Workstyle are also required – to be presented for approval alongside the 2009/10 budget Total £825k £800k
3.3.7 Economic Master Plan The Economic Master Plan was approved by Full Council on 7th November 2007 and its purpose is to provide the strategic framework to guide economic and physical development and investment in Sheffield over the next ten to fifteen years. Creative Sheffield, as the city’s development company, will lead on the implementation of the plan.
A report to Cabinet, “Resourcing the Economic Master Plan” on the 13th February 2008 details the various sources of funding identified to implement the plans and programmes so far. The future financial implications of the plan will be considered on a project by project basis.
The total 5-year cost (2008/9 – 2012/13) of this activity is £32m of which the City Council’s share is £8.2m. The Council’s share of the funding is linked to the work in progress to determine the usage of LABGI as detailed in section 5.3.4. An amount of £2.9m over the period is included in the general fund revenue budget.
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3.3.8 Kier Contract review 2013 The Kier contract expires in March 2013. Although this is at the end of the planning period covered by this strategy, work has already been done to determine the options open to the Council. As part of 2008/09 budget strategy the Council looked at possibility of seeing what financial benefit might be secured from negotiating an extension to the Contract. However, Counsel's opinion obtained as part of this work indicated that the Council has no legal or contractual basis for any such negotiation.
3.3.9 South Yorkshire Digital Region Broadband Network (SYDR) The South Yorkshire Digital Region Broadband Network (SYDR) aims to advance the broadband capability of the region by 5 to 7 years and put it in the upper quartile. If successful, the project will lay fibre optic cable which enables speeds of 50mbps for all users with a guaranteed quality of service as opposed to the current average speed in the region of 6mbps. A special purpose vehicle (SPV) will be formed with the four members of the South Yorkshire Region and Yorkshire Forward.
As detailed in the Cabinet report on the 24th September 2008 SCC’s role will be as a shareholder in the SPV and will guarantee the performance of the company as well as sharing in any surplus in proportion to its 17% shareholding. It will provide £4m of loan funding (funded through prudential borrowing) and will underwrite the repayment of the loan by £0.5m per annum should the SPV not receive sufficient revenue. This repayment of £0.5m will be managed as a risk via the Risk Based Reserves Strategy for the life of the project (see 9.2.1).
3.3.10 Digital Campus The digital campus initiative, one of the seven original city centre masterplan projects, will provide a regional centre for high growth businesses in the creative and digital industries. Both Yorkshire Forward and English Partnerships have provided significant capital for the project, however, the risk of running the Electric Works “Hub” building within the Digital Campus and its facilities lies with the Council. To ensure the future financial viability of the venture, which is likely to achieve the promotion and improvement of the economic well being of Sheffield, it was agreed at Cabinet on the 24th September 2008, to further fund this project by £700k.
Work is currently underway to determine whether the Council should buy out the lease on the building. A report to Members will be brought forward once a proposal has been developed.
3.3.11 Delivering for Business The Council is committed to listening to business, and to being more responsive to what businesses in Sheffield want in the development of Council policy and strategy. Delivering for Business wraps up a number of policy commitments into a package of actions designed to achieve the ambition for Sheffield to be a great place to do business.
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A number of actions are being progressed during 2008/09 within existing budgets such as establishing a Leader's Business Advisor Panel, implementing a Buy Local Action Plan and reforming the Planning service.
A number of longer term initiatives are being worked up during 2008/09 where funding is yet to be identified. These include:
• Single Access Point for Business - ensuring all business-facing services can be accessed through a single point of entry with dedicated resource to manage and follow up each enquiry.
• Skills development support for business - supporting employers to train their workforce, bridging the gap between employers' requirements and mainstream Government funds.
• Annual Business Survey and Report - benchmarking the Council's effectiveness in supporting local business
4 COMPREHENSIVE PERFORMANCE ASSESSMENT
The Comprehensive Performance Assessment is a framework for assessing the performance of all Local Authorities. It was developed and is administered by the Audit Commission. Further information on the background to CPA can be found on the Audit Commissions’ Website.
4.1 Use of Resources The Comprehensive Performance Assessment currently comprises 8 elements:
• Benefits
• Children and Young People
• Culture
• Environment
• Housing
• Social Care (Adults)
• Corporate Assessment
• Use of Resources
The Council is currently rated as a Four Star Authority – the highest score available in the assessment regime.
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The element of the overall CPA most directly related to the Financial Strategy is Use of Resources.
Over the last 3 years, Sheffield has maintained an overall score of 3 out of 4 in the CPA Use of Resources assessment; this represents solid performance given the rising standards that have applied in the assessment process over time.
Use of Resources 2005 2006 2007 Overall 3 3 3 Financial reporting 3 2 2 Financial management 3 3 3 Financial standing 3 3 3 Internal control 3 2 2 Value for money 3 3 3
In the 2007 Use of Resources Judgement, the Audit Commission concluded:
“The Council's performance demonstrates good use of resources overall with the potential to improve further. The key focus over the next period should be on consolidating this position with a particular emphasis on addressing the internal control weaknesses identified.” Source: Use of Resources Auditor Judgements 2007
4.2 Financial Reporting Significant work was undertaken on the 2007/2008 accounts to improve the quality of the statements and supporting information. Summary accounts have been drafted to provide a more accessible version of the Council’s key financial statements. This work has been recognised by the external auditors in their audit of the accounts and their Governance Report, which was presented to the Audit Committee on the 25th September, acknowledged that considerable progress had been made.
4.3 Internal Control Improvement efforts have been targeted at the risk management processes and partnership governance arrangements. Work is still in progress in both areas, but the Annual Governance report recognises that the Council is making good progress in addressing improvements in internal control (see 9.1.2.)
4.4 CAA As previously mentioned in 3.2.3 the assessment process will change in 2009 with the establishment of the Comprehensive Area Assessment and the introduction of a broader definition of Resources. It will be imperative that the Council focuses on continuing improvements in all areas of the Use
Page 16 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 of Resources assessment to ensure that good overall performance is maintained as the assessment process changes. The changes in the Council’s finance system and its associated processes, as part of the World Class Financial Management Programme will help to achieve this.
5 INCOME STRATEGY
The Council has six key sources of income:
Revenue Support Grant – This is a general Government Grant based on a series of complex formula which is not earmarked in any way.
Council Tax – This is a local taxation based on property values, which is set annually and collected by the Council.
Other Grants – The Council receives a large number of specific grants from Government and other agencies to pursue a range of policy objectives. These grants range from the large ringfenced Dedicated Schools Grant (DSG) to the less tightly ringfenced Area Based Grant. In the chart below, the DSG and other grants are separated due to the relative size of the DSG.
Fees and Charges – The Council makes charges and levies fees for a wide range of services that it provides. These range from car parking charges to social care, taxi licencing to planning applications.
Council Housing Rents – Money paid to the Council by Council House tenants.
Other Council House Income – This includes the government subsidy and funding from the major repairs allowance.
The last two sources of income are attributable directly to the Housing Revenue Account (HRA) and dealt with in Section 11.
The Council’s total gross external income of £1.41 billion splits into the categories above as follows.
Page 17 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 Gross External Income 2008/9
Council Tax 13.8% Other Grants 25.9%
Revenue Support Grant 19.7%
Dedicated Schools Fees and Charges Grant 8.5% 20.3% Council House Rents Other Council 8.7% House income 3.1% The main message from this chart is the relatively small proportion of income that comes from Council Tax, 14%, and the high proportion of income the Council receives from various Government grants. The amounts received via the Revenue Support Grant, Dedicated Schools Grant and Other Grants total over two-thirds of the Council’s income for 2008/9.
The fact that the majority of funding comes directly from the Government means that any growth in the Council’s funding is largely determined by the Government, leaving very little real discretion to the Council. If the Council wishes to increase resources, a relatively large increase in Council Tax is required to achieve a relatively small percentage increase in overall resources (see 7.2).
5.1 Revenue Support Grant The final settlement for 2008/09 announced on the 24 January 2008 gave Sheffield an increase in RSG of 2.1% and 1.8% for 2009/10 and 2010/11 respectively. These below inflation increases for the following 2 years make the period of this medium term financial strategy particularly challenging.
Revenue support grant is calculated through a complex formula based on population and many other factors. There are three key issues that affect the RSG received by Sheffield:
• Sheffield’s population has grown in recent years, but the population statistics used in government grant calculations have not kept up to speed with this increase. This results in a lower RSG per actual head of population. This has been an issue for Sheffield for the last few years and in the settlement data for 2008/09 the population used was over five million less than the latest population estimate produced by
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ONS. On a crude population per head basis this reduces our settlement by £4.8m although it should be noted that the formulas are complex and population is just of the factors that influence. However, this is still a significant issue and representations should continue to the CLG in an attempt to influence future grant calculations.
• In common with many industrial cities, Sheffield’s older people require support from the Council such as care services at a younger age than people in non-industrial areas. So, a person aged 80 in Sheffield will on average require more Council services than say a person aged 80 in a Shire County. The RSG formula does not accurately reflect this issue.
• Sheffield has some very affluent areas and some very deprived areas. This is almost unique amongst the core cities, where the affluent areas of, say Manchester and Liverpool, are largely outside the Manchester and Liverpool City Council areas. The geography of Sheffield means that, on average people are relatively well-off, but this averaging does not reflect the high costs to the Council of providing services to the most disadvantaged people of the city.
Compared to other Core Cities, Sheffield’s RSG allocation is relatively low per head of population:
RSG (£) Per Head of Population - Core Cities
Manchester 759
Liverpool 718
Birmingham 639
Newcastle 585
Nottingham 578
Sheffield 521
Leeds 399
Bristol 395
5.2 Council Tax Money from Council Tax forms about 14% of the Council’s gross external income and it is the source of funding that the Council has the most control over. That said, the Government has sought to exercise influence over
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Councils in setting Council Tax increases and has made it clear over a number of years that high increases in Council Tax would result in capping. As part of the 2008/9 – 2010/11 three year financial settlement, the Minister wrote to all Council Leaders:
“The Government expects the average council tax increase in England to be substantially below 5% in 2008/09. I made it clear to the House that we will not hesitate to use our capping powers as necessary to protect council taxpayers from excessive increases. This applies to all authorities - including police and fire authorities.” Source: CLG Website
Sheffield City Council has had a long-term objective of steadily reducing Council Tax increases to within prevailing inflation levels. This has now been achieved following a number of years where Council Tax increases have been reduced in a controlled manner to bring the level of increase down in line with inflation levels.
The Council now has Council Tax increase planning assumptions of 2.0% for 2009/10, 1.5% for 2010/11 and 2011/12 and 0% the 2012/13 and these have been used in the financial projections in Section 8
The chart below shows that whilst RPIX has remained (until recently) fairly flat at between 2.1% and 3.2% over the 10 year period, Council Tax increases have fallen from a high of 9.8% to a low for 2008/9 of 2.5% which is below the prevailing rate of inflation for the first time.
9.8%
Sheffield CT Planning Assumption 6.9% Sheffield CT Increase 6.9% Actual 5.9% 5.7% RPIX 5.2% 4.9% 4.8% 4.6% 3.9%
2.5% 2.0% 1.5% 1.5%
0.0%
9 /0 /1 2 /3 /4 5 /6 8 1 3 9 0 2 3 5 /09 1 /12 1 9 0 0 0 0 8 1 9 0 0 0 0 0 1 1998/ 1 2 2001/ 2 2 2004/ 2 2006/7 2007/ 0 0 2 2009/10 2010/ 2 2012/
Source: Office for National Statistics, Sheffield City Council analysis
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Sheffield Council Tax increase for 2008/9 of 2.5% was well below the Core City average as the chart below shows:
Liverpool 4.9%
Leeds 4.7%
Bristol 4.0%
Newcastle 3.9%
AVERAGE 3.4%
Nottingham 3.0%
Manchester 2.5%
SHEFFIELD 2.5%
Birmingham 1.9%
Source: http://www.local.communities.gov.uk/finance/ctax/data/ctax089t6.xls
However, in absolute terms, Sheffield’s Council Tax is still relatively high when compared to other Metropolitan Authorities at 11th highest out of 36, but Sheffield’s position in the table is falling due to relatively low Council Tax increases in recent years.
Comparing Sheffield to the Core Cities in absolute terms is slightly complicated:
• Sheffield’s absolute Council Tax is just above the average at £1,241 compared to the £1,194 average.
• However, Sheffield is ranked 5th highest out of 8 with Nottingham, Bristol, Liverpool and Newcastle charging higher Band D Council Tax levels and Manchester, Birmingham and Leeds lower in absolute terms.
Details of Sheffield’s position against both the other Metropolitan Authorities and the Core Cities, is shown in the appendices at Section 18.
5.3 Other Grants
5.3.1 Dedicated Schools Grant The Dedicated Schools Grant (DSG) is the largest single element of the Council’s funding - £275 million in 2008/9. It is a ring fenced grant passed directly to the schools and is based on pupil numbers provided by the Authority.
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On 12 December 2007, the Department for Children, Schools and Families announced the DSG figures for the period 2008/9 –2010/11. This settlement announced a minimum cash increase of 2% per Authority, irrespective of pupil numbers (to protect those with falling rolls). The table below shows how Sheffield’s increase compares to the national average.
Sheffield National Per Pupil Average 2008/09 4.5% 4.6% 2009/10 3.8% 3.7% 2010/11 4.3% 4.3%
The overall national and local increases were, on the face of it, ahead of 2007 inflation levels, however, a number of additional services are included within the 2008-2011 settlement. Amongst these are:
• additional funding for expanding the academies programme
• the expansion of the early years entitlement from 12.5 to 15 hours per week, and
• a range of other targeted funding representing ministerial priorities.
This means that with the Government’s announcement of teachers’ pay awards of 2.45%, 2.3% and 2.3% over the next three years, and the associated increases in relation to pay progression there will be very significant pressure on schools.
5.3.2 Area Based Grant Area Based Grant (ABG) is a corporate grant, paid to the City Council in addition to the Revenue Support Grant. It is made up of various grants that were previously provided as specific grants. It has replaced the Local Area Agreement grant which was introduced in 2005/06 and pooled some specific grants and developed it further by providing further flexibility of funding and reducing reporting requirements. ABG is not ring fenced, it is provided for the use in the whole area to support the delivery of local, regional and national priorities, including the achievement of LAA targets. In line with the RSG and the DSG we have been provided with three year allocations of ABG, which are provided in the table below:
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£’000 2008/09 2009/10 2010/11 WNF Element 11,300 13,420 13,964 Other ABG 35,146 34,656 31,601 Supporting People n/a 25,227 25,227 (from 2009/10) Total ABG 46,446 73,303 70,792
The appendices at Section 20 provide the breakdown of the area based grant by the various grant schemes which have now been pooled.
For 2008/09 it was agreed that the area based grant would continue to fund existing services, with a view to developing a new allocation process for years 2 and 3 as part of the overall approach to the Sheffield First Partnership.
It is proposed that a new approach to resource use and monitoring will be adopted from April 2009, whereby the overall allocation is divided into four strands as follows:-
• Passported funding – whereby funds are already tied to committed activities via partnership agreements, contracts etc.
• A young people funding pot – containing previously ring fenced funding targeting young people.
• From 2010, an enterprise, employment and skills pot.
• A fully flexible funding pot made up of a small number of funds that will be combined to support the delivery of the city’s priorities where extra resources are required.
These categorisations would lead to an allocation of the Area Based Grant as follows:-
Categorisation 2009/10 2010/11
ABG Flexible Pot (including WNF) 20.08% 20.08%
Passported Funding 69.77% 60.58%
Pooled Young Persons ABG 10.15% 10.15%
Employment, Enterprise and Skills Pot 0% 9.19%
Total 100.00% 100.00%
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New ABG funding strands will be passed into the ABG flexible funding stream from April 2009. On occasion these funds maybe passported out but not before they have been assessed for how they can be used to achieve the city priorities.
5.3.3 Local Public Service Agreement The Council entered into its Second Local Public Service Agreement (LPSA) with central Government in August 2005. The agreement, which has a strong partnership element, is designed to accelerate performance in a number of key improvement areas and to improve outcomes in the city. The agreement is made up of 12 outcome areas, sub-divided into 31 targets. The potential value of this agreement is £14,231,825 or approximately £1.2 million per outcome area.
5.3.3.1 Performance to date
By January 2008, 19 out of the 31 targets had ended and the Council submitted a claim for £5.05 million of Performance Reward Grant (PRG). This was 62% of the performance reward grant available at this stage. This claim was approved in March 2008, and the first instalment of £2.52 million was paid to the Council. The second instalment of £2.52 million is due in March 2009. The PRG is paid as 50% Revenue grant and 50% Capital grant.
5.3.3.2 Partnership Activity
A number of targets have been achieved through partnership activity. For some time it has been understood that where performance reward grant has been earned through partnership activity, it would be made available to the partnership responsible to use in pursuit of city priorities. This is relevant to two areas where reward grant has been achieved.
An element of reward grant has been earned through the activities of the Sheffield Safer Communities Partnership. £890k of the PRG paid in March 2008 has been committed by this partnership to address the local area agreement priorities on crime, arson and anti-social behaviour. Members are asked to approve the use of this element of the PRG.
Further reward grant may be earned, subject to audit, from the activities of the Healthy Sheffield Partnership and a further payment of £890k relating to the outcomes delivered through the Sheffield Safer Communities Partnership will be paid in March 2009.
5.3.3.3 Further Distribution of PRG
In addition to this, there are 12 LPSA targets remaining with a maximum of £6 million still available. It is very difficult to predict how many of these targets will be achieved, but a reasonable estimate would be that the Council will earn at least a further £3 million in performance reward grant
Page 24 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 payable in March 2009. Until this is known with more certainty it will not be included in any projections.
It is recommended that the further distribution of the PRG received and receivable to date is considered in the planned Cabinet Report in December 2008 covering the detailed financial projections for the Council referred to in section 8 of this report.
5.3.4 Local Authority Business Growth Incentive (LABGI) The LABGI scheme was introduced in April 2005 following a pilot scheme in 2004 and continued to the end of 2007. All Authorities could potentially benefit from the scheme and there was almost £1billion to be spent nationally on this scheme over its life.
The scheme for the calendar year 2007 has been revised by Government in the light of legal action taken by a number of Authorities who were concerned about the way that funding was being allocated. As a consequence of this, the Government have held back a substantial portion of the original £1billion available pending the outcome of any further legal action. At this stage, the amount of contingency held by Government is understood to be £100million. The Government has said publicly that all this funding will be “allocated to local authorities in full, in line with the policy purposes for which LABGI was designed. The exact methodology will be confirmed once any uncertainty associated with legal challenges has been resolved.” Source – CLG Website.
Sheffield has been allocated a total of £3.2million in 2007 and to date Sheffield has received a total of £9.2million from LABGI. This funding has been earmarked for economic development activity and is linked to the Council’s share of costs of resourcing the Economic Masterplan (see 3.3.7).
Work is currently in progress to determine the allocation for LABGI funding over the next few years and recommendations will be made to Members in the near future. Final allocations will be presented for approval as part of the 2009/10 Budget process.
CLG are now consulting on a revised scheme aimed to be simpler to understand but with significantly reduced amounts available. Under the revised scheme there will be £150m available for the years 2009/2010 and 2010/2011. Initial analysis by Sigoma indicates Sheffield could receive just over a £1m over the two years if economic growth continues at the same level as the last few years, but as this is not certain it will not be included in any projections at the moment.
5.3.5 Supplementary Business Rates Supplementary Business Rates allow Local Authorities to raise additional revenue from businesses in specific geographical areas. As an example, this power could be used to raise additional revenue to fund infrastructure works in an industrial area with the business community agreeing to contribute to the works through SBR.
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The introduction of SBR was one of the recommendations of the Lyons Enquiry, which reported in March 2007 and the Governments intentions to accept Lyon’s recommendation was confirmed with the publication of a White Paper on the subject in October 2007. It is expected that the White Paper will be brought into legislation by 2010.
This scheme could be beneficial in some areas therefore it is envisaged at this stage that it will be introduced on a scheme by scheme basis once it is brought into legislation.
5.4 Fees and charges The income the Authority collects for fees and charges accounts for 8.5% of its total income. Given the significant amount generated the Council needs to develop a more strategic and transparent approach to its fees and charges in the form of a charging policy. This would also assist future year’s budget projections and could help achieve the Councils priorities.
The Audit Commission have recently undertaken a study in this area and their report “Positively Charged” outlines their findings. The Commission found that the public appear more receptive to charges than councils suppose, probably because they can choose whether to use the service or not. Given the significance of the income that can be generated from charges, from 2009 the Audit Commission will take account of how well councils are using their powers to charge as part of its annual use of resources judgement.
In formulating a charging policy there are a number of considerations:-
• What other Councils are doing – Generally other authorities collect 8% of their total income as fees and charges and over half of this is from Education services such as school meals and transport, Social Services such as homecare and Highways such as Parking. We are comparable to this, collecting 8.5% of total income as fees and charges.
• Legislation / statutory charges – Although the Local Government Act 2003 provided local authorities with further flexibilities for charging there are still some services whose charges are fixed by legislation such as local land charges and planning fees (see Section 19).
• Market forces – For some areas of charging there will be competition from other bodies such as parking and leisure centres. Where there is an external market consideration needs to be given to the charges applied.
• Inflation, both general RPIX inflation and more service specific inflation.
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• Political priorities – Charges can be applied in order to assist political priorities for example, introducing road tolls to reduce traffic congestion and improve the quality of the environment.
In developing a charging policy the Council will also need to take customer feedback, both current and potential users of services into account, to establish what services people are prepared to pay for and at what level. This consultation process should also include council tax levels to verify that our planning assumptions on council tax increases are in line with public expectations and also so that the public can see the complete package. The importance of this consultation is reflected in the revised objectives of the Financial Strategy (see 3.1).
The top five income streams for each Directorate are contained within Appendix 19.
5.5 Other Income
5.5.1 Landfill Allowance Trading Scheme (LATS) The Waste and Emissions Trading Act 2003 places a duty on Authorities to reduce the amount of waste disposed of to landfill and also provides the legal framework for the trading scheme. The scheme allocates tradable landfill allowances to each Authority at a level that will allow England to meet its contribution to the UK targets under the Landfill Directive.
Within each scheme year (1 April – 31 March), authorities are able to landfill up to the level of allowances held. To meet the requirements of the scheme, the Council must ensure that it has sufficient allowances to Landfill. Any deficit or excess in allowances can be bought or sold between Authorities.
Sheffield is in a strong position in this scheme because of the investment made in the Veolia contract and the incinerator. In theory the Council should be able to sell significant quantities of allowances to other Authorities who landfill the majority of their waste and may not have enough allowances.
Previous financial planning assumed that Sheffield would gain significant financial benefit from the scheme, however, an effective market for allowances has failed to develop. There have been very few trades between authorities and prices have been very low. It appears that the level of allowances granted to each authority in the early years of the scheme is largely sufficient to meet their landfill requirements.
Starting from 2009/10, the allowances allocated begin to reduce significantly and the problem of how to manage within landfill allowances is a major issue for many authorities, leading to an increase in large scale incineration and recycling.
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There is little prospect of selling allowances for the period 2005/6 to 2008/9. There is no effective market and Authorities appear to have sufficient allowances to meet their landfill needs. The Council is investigating opportunities to sell allowances now for the period from 2009/10. There is still no real evidence of a market for allowances, but some trades have taken place, but in the absence of any significant volume of trading, it is proposed that no specific assumptions regarding LATS income are made in this strategy. Any income received will be required first to cover the income assumptions already made in previous year’s budgets.
5.5.2 Continuing Health Care Contribution from Primary Care Trust In the 2008/9 budget process, an assumed annual saving of £3m in 2008/9 and beyond was used as part of the process of balancing the overall Council budget. This saving arises from the shift in liability, under new Department of Health guidance, for certain costs from Local Authorities to Primary Care Trusts (PCTs). This amount was viewed at the time as a prudent assumption given the assessment process for determining the ultimate impact of the new guidance is lengthy, complex and not under the Council’s control.
Since the budget was completed, progress has been made by the PCT to more accurately determine the size of the cost shift for existing users. Also, it became apparent that in terms of change in liability for care costs, the start date is October 2007, which meant there was a 2007/08 impact which had not been previously assumed.
The outcome of PCT's review work of a sample of existing service users has resulted in them assessing that some £2.4m of care costs incurred by the Council in the period October 1 2007 to March 31 2008 should, under the new guidance, be met by the PCT. In order to get the financial impact into their 2007/08 accounts, the PCT have paid the Council £2.4m in relation to 2007/08. This amount was the best estimate at the time and subject to change once the review was complete. This amount is currently within unearmarked reserves and an allocation of £300k from this receipt has been approved to support the CSCI Inspection.
The work carried out so far in 2008/2009 (as at end of September) indicates that just over 150 people have switched from Community Care to continuing Health care giving a full year saving of just less than £3m. On this basis therefore it is highly likely that the £3m saving target will be exceeded.
Work is still on going to fully assess the financial impact of this shift in liability for both 2007/2008 and 2008/2009. It is recommended that any excess in these repayments over the budgeted level of £3m are left unearmarked and considered as part of the overall 2009/10 budget.
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5.5.3 Restoration Fund The June 2007 floods caused considerable damage to infrastructure that the Council is responsible for. Significant government support was received, but not all the damage was covered. The Council earmarked £3m of Corporate Resource Pool (CRP) funding over 2 years to support capital works that did not receive any other government support. Recently, an additional £2.6m has been received from the European Union’s Restoration Fund following a British Government claim for financial assistance.
The original CRP allocation was based on assumptions of capital receipts at the time, and since that time, receipts are significantly lower following the downturn in the property market.
At this stage, it is not clear whether the CRP will be able to support all the schemes required including the flood reconstruction works. It is recommended that the £2.6m Restoration Fund money is held against that risk until the full capital programme is presented to Members in November.
6 EXPENDITURE STRATEGY
Given the high percentage of the Councils income that can not be influenced, expenditure inevitably has to be tightly managed in order to balance the budget. The two biggest items of expenditure are employee costs, which account for just over a third of total expenditure, and payments for services such as care packages and outsourced services such as Veolia. Rather than consider individual headings of expenditure the following section will consider the expenditure of each Directorate.
6.1 Cross-cutting issues There will always be issues that affect the Authority as a whole which are considered below. The nature of the issue will determine whether it will be dealt with by the Authority corporately or whether it will need to be built into the Directorate projections.
• Pay and Grading – The Authority is still in the process of implementing a new pay structure following the national agreement in this area. Job family allocation is being completed and pay modelling is underway. At this stage the one off and ongoing financial implications are not known. Some corporate provision exists for General Fund one-off and ongoing costs, but modelling to date and comparisons with other Local Authorities suggest that this may not be sufficient, especially in the early years when the costs will be higher as a result of pay protection. Costs relating to schools will be met from Dedicated Schools Grant allocations (see 5.3.1).
• Pay Awards – The pay award for the majority of local government workers (excluding teachers) in 2008/2009 has not yet been agreed
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and negotiations have been re-entered into it following industrial action. A corporate provision for a 2.75% increase is available for 2008/2009 and 2.75% has been allowed in 2009/2010 projections. Any increase above this will need to be contained within Directorate budgets.
• Pension Contributions – A combination of the poorly performing stock market and increasing life spans has resulted in the requirement to increase the contributions to the pension fund over the last few years. These contributions now stand at 18% and although a corporate provision was provided in 2008/09 to achieve this level, this was a one off, therefore in future years Directorates will have to fund this increase.
• Energy Inflation – The Council negotiates energy supply contracts (Gas and Electricity) on the commercial market with fixed prices, typically for a year or more. At the last renewal, a cost reduction was achieved, but this time a significant cost increase in the order of 80% is likely. Some corporate provision (£1m) will be included in the projections for 2009/10 and beyond, but this may not be sufficient to cover the cost increase – early indications are that the increase in street lighting electricity costs alone will account for the majority of the corporate provision for 2009/10.
• 2008/9 Budget – At the end of Quarter 1, General Fund budget monitoring showed a forecast Directorate overspend of £3.7m for 2008/9 mitigated in part by corporate one-offs. The projections for 2009/10 and beyond assume that the budget targets for 2008/9 are achieved.
• Capital receipts –The pressure currently being placed on Capital Receipts by the weak property market may impact on Revenue activities if additional repairs are required in lieu of delayed capital works. This is also covered in Section 10.4 and a separate report on this issue will be discussed with Members.
6.2 Value for Money The Council has received a score of 3 out of 4 in the Audit Commission’s Use of Resources judgements for the last 3 years and has also received a score of 3 out of 4 on the value for money element of the judgement (see 4.1). The Council has embedded processes that drive improvements in Value for Money, which recently have been extended via the Organisational Transformation Programme, the Outstanding Sheffield Programme and the Service Reviews such as Care 4 You.
6.3 Legacy Issues Legacy financial issues – relating to decisions made by the Council in the 1980s, will have a material impact on the Councils finances for the period of this strategy and beyond. There are two key remaining issues (Major
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Sporting Facilities and North British Housing Association) that together will cost approx £28.2 million in 2008/09, rising at approximately £450k per year.
The costs associated with these issues will continue for the duration of this planning period, with the first savings opportunity for the Council coming after 2016. All legacy issues will be resolved by 2024.
6.4 Service Cost and Demand Pressures Detailed financial projections are not yet fully developed. Work is in progress with Members to assess pressures and savings opportunities and a further report to Cabinet is expected to be brought forward for approval in December.
As part of the ongoing process, Directorates are being tasked with developing more commercially focussed ways of working. The outcomes of this work will be contained in the planned December Cabinet report.
Each Directorate has begun preparing their forthcoming budgets firstly by analysing their unavoidable pressures i.e. increases over which we have no control, recommended investments and other pressures, such as demand pressures. They are also considering what savings and increased income can be generated to offset these, including increasing fees and charges by inflation (5%) where appropriate.
At this stage, only the analysis of unavoidable cost increases is sufficiently complete for publication.
6.4.1 Children and Young People’s Directorate CYPD budget is around £82m (2008/2009) excluding schools budget. The key pressures on the Directorate are to:
• Raise attainment and aspiration • Ensure children and young people are safeguarded and statutory and court requirements are met • Provide inclusive opportunity and support for all children and young people
The Directorate has significant demand led pressures in the provision of children’s social care, but has sought to take a risk based approach in distinguishing spending pressures from potential increases in demand.
6.4.2 Neighbourhoods and Community Care The NCC General Fund Revenue Budget totals £148m (2008/2009). The Directorate is also responsible for the Housing Revenue Account and large Capital Programmes including decent Homes.
The only unavoidable pressure is the price inflation on Home Care contracts explicitly linked to RPIX (£0.6m). However, on current trends and
Page 31 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 reasonable assumptions, volume demand pressures in community care are forecast to continue to rise.
6.4.3 Development, Environment and Leisure The DEL budget totals £129m (2008/2009). The Directorate has responsibility for a diverse range of services and functions; these are structured into the six key services of Development Services, Culture, Environment & Regulatory Services, Parks and Countryside, Street Force and Strategic & City Centre Services. In line with the other directorates they have unavoidable pressures arising from inflationary increases as well as significant service pressures as a result of the current economic climate. These are most noticeable in Development Services which has seen a considerable reduction in fee income.
6.4.4 Chief Executives The Chief Executives has a revenue budget of £41m (2008/2009). The Directorate has three broad functions:
• It supports the Council in delivering its corporate objectives through a combination of direct delivery and corporate leadership;
• It provides key support services corporately, where it is most cost effective to do so; and,
• It provides front line services to the community through the Corporate Contact Centre and First Point, Facilities Management and Transport and with key strategic partners.
The Directorate is facing inflationary cost pressures and reduced fee income, together with the loss of grant funding for the ‘101 service’. Also, as mentioned in 3.3.11 further work is required on the longer term initiatives on Delivering for Sheffield.
7 RISKS AND SENSITIVITIES AFFECTING THE MTFS
7.1 Key Risks It is imperative in a robust financial strategy that all the risks affecting it are known about. These risks can be separated into those affecting the overall strategy and the Authority as a whole and risks affecting each specific directorate.
7.1.1 Key Corporate Risks The Authority maintains a Corporate Financial Risk Register (CFRR) which details all the significant financial risks facing the Council at a given time. The top risks at the time of writing the strategy are:-
• Capital Receipts & Capital Programme - The current economic climate is affecting the property market and reducing the availability
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of capital receipts, which are used to fund the Corporate Resource Pool.
• Pay and Grading – Neither the one-off or the ongoing costs of pay and grading are not yet known and there is a risk that staff costs could rise above the level assumed, especially in the initial years where pay protection will be paid to affected individuals.
• Pension Fund – There is a significant deficit on the South Yorkshire Pension Fund attributable to Sheffield City Council and a risk that this could be called in for payment.
• Transformation Programme Projects - The affordability and success of the Transformation Programme, especially the Outstanding Sheffield Programme, given the significance of the Programme for the Authority.
• Highways PFI - Although the Government has approved the Council’s bid for the Highways PFI there are still significant risks surrounding its delivery such as finding a suitable contractor whose contract terms are acceptable to the council. The award we have received for this scheme is the largest PFI credit to date for any local authority, is in a sector which is substantially untested and involves the transfer of a large number of staff. As outlined in 3.3.3 there is currently also a risk on the amount of funding the Authority will need to contribute for this scheme increasing significantly from the £9.6m that was initially modelled.
• South Yorkshire Broadband Digital Region Network – SCC will provide a loan of £4m to the Special Purpose Vehicle (SPV) set up to deliver the project and will underwrite the repayment of the loan by £0.5m per annum should the project not receive sufficient revenues (see 3.3.9).
• E-Campus – There is a risk that the costs of running the business centre over the period of the lease are not covered by the rental and other income streams and any shortfall with fall to the Council (see 3.3.10).
7.1.2. Key CYPD Risks
Although the position with regard to look after children is stabilising with the economic downturn there is the potential for an increase in the breakdown of family units and hence an increase in the number of children coming into the care system. If the numbers increase to the level they were in October 2007 there would be an additional cost of £1.7m.
Other risks facing the Directorate are the potential increase in adoption costs following the Lewisham judgement (upto £1.25m) and the Care Matters changes if local authority care needs to continue till children are 21.
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These costs are slightly mitigated by grant (£150k) but the risk is £2.2m in 2010/11.
7.1.3. Key NCC Risks
One of the main risks facing the Directorate is that as a result of new guidance some costs may not be able to be capitalised in future years. Some costs currently charged to capital (approx £2m) are not necessarily easily allocable to specific assets, as they need to be under the latest SORP Guidance. Thus there is a risk that in the future these will have to be charged to revenue accounts. The amount of super profit from Kier is starting to reduce as the Decent Homes programme starts to decline. The reliance on this profit will need to be removed from 2010/2011. Also in 2010/2011 it is proposed to transfer the responsibility of certain aspects of LD care from the PCT to the Local Authority. There is a significant risk that insufficient resources will transfer to bring the service up to a reasonable standard. Work already undertaken has shown a significant investment is required to modernise the service.
7.1.4 Key DEL Risks
The largest risk to the DEL budget is the continuance of the pressures in the 2008/2009 budget, reflected in their latest monitoring statements (see 6.1). These pressures total £3.1m and although increased expenditure controls have been introduced to mitigate these, the Directorate is facing further pressures in the forth coming year (see 6.4.3).
7.1.5 Key Chief Executives’ Risks
The key risks lies in ensuring that the Transformation Programme Projects manage project costs within budget and deliver benefits as per their respective approved business cases.
7.2 Key Financial Sensitivities The following table provides an indication of the impact of a 1% change (either up or down) in each of the key cost and income areas affecting the Council’s budget:
Driver Effect of 1 percentage Point Change
Revenue Support Grant £2.5m (now known until 2010/11)
Council Tax £1.8m
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Pay Inflation or increase in £2.3m pay bill (ie Pay and Grading)
Price Inflation (on Costs) £4.0m
8 OVERVIEW FINANCIAL PROJECTIONS
At this stage in the budget process, detailed financial projections are not available. Pressures and savings opportunities are being quantified and categorised as are efficiency opportunities.
Pressures are being assessed as:
• Unavoidable
• Recommended Investments and Policy Choices
• Other Pressures
At this stage, a total £8.7m has been identified as Unavoidable, with further work in progress to understand and quantify recommended investments and policy choices and other pressures.
A significant number of savings opportunities are also being discussed with relevant Cabinet Members. Once this work is completed and savings proposals fully developed, a further report will be brought forward for Cabinet approval before Christmas. This further report will contain detailed financial projections including details of cost/demand pressures and recommended savings opportunities.
As this strategy is being developed, the economy and global financial system is subject to unprecedented levels of volatility and uncertainty. It is likely that the UK economy will suffer a period of down-turn and that additional pressures on Council services will result. The Council will also be operating in a less stable climate in terms of fee income, capital financing arrangements and asset values. All these issues are being taken into account in the preparation of the detailed financial projections.
9 RISKS AND FINANCIAL RESERVES
As well as considering the risks that directly affect the MTFS (see 7.1) the overall risks affecting the authority as a whole, which can be split between operational and financial, need taking into account. The authority maintains a suitable level of reserves to cover a prudent estimate of financial risk, as well as specific reserves.
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9.1 Risk Management The Council is currently undertaking a process of updating its risk management framework. The Council has a Corporate Risk Management Group (CRMG) which is made up of Senior Officers from across the Council who are taking a lead on the current developments. The emphasis is moving from having a separate process which is linked to large risk registers to one that is embedded within the Council’s day to day business and reporting processes and in particular is linked to the key service objectives of the Council and the risks that could prevent these.
Risks for the most part will still be managed at a service level. Service managers will be asked to identify and evaluate their risk in relation to service objectives. There is a clear escalation process built into the new risk management framework which will allow risks to be escalated and monitored at the most appropriate level; this will be at Service, Directorate or a Corporate Level. A Corporate risk register is being developed and will be monitored and maintained by the Council’s Executive Management Team (EMT). This will be an ongoing process, but the first draft will be completed by the end of November.
The new process will be rolled out by the end of the current financial year and a number of targets have been developed to allow this to be monitored and kept on track. CRMG will monitor progress and report this to the Executive Management Team as appropriate. In addition an external review is being undertaken shortly of the process in order to identify any areas which can be improved. The Council’s Audit Committee is charged with providing Member oversight of the Council’s risk management arrangements and they will be fully briefed on the changes shortly.
Many risks that face services are homogenous for all services such as financial management and Human Resources. Corporate processes and systems are being developed in these areas that will ensure consistence of approach and will also allow risks to be identified and mitigated at a corporate level. These systems and processes have been incorporated into the new framework to minimise any duplication in effort in managing risks.
9.1.1 Financial Risk Management Each main service area (i.e. Directorate) keeps a financial risk register in the agreed format, which are reviewed quarterly via the Directors of Resources Group. The significant risks from each of the registers, where significant is classed as greater than £1m, is added to the Corporate Financial Risk Register (see 7.1.1). Other corporate financial risks are added to this as and when they are identified and a corporate review by the Deputy Director of Corporate Resources is undertaken quarterly. This register is reported to EMT and once the new system for operational risk management is functioning they will be reported jointly.
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9.1.2 Operational Risk Management The management of operational risk is key to the achievement of Council’s objectives and is therefore integral to the new process. The Service areas have the primary responsibility for the identification, recording and controlling of operational risk. They have the appropriate skills and knowledge to identify the risk that could affect their performance. There is a process for these to be escalated through all levels of management throughout the Council.
Services have the responsibility for demonstrating that they have reviewed their risk at least quarterly and Directorates have the responsibility for challenging the processes.
9.2 Reserves The Council holds a number of reserves for a variety of purposes. Some reserves are available for use, whilst others are set aside for specific purposes. Each reserve and its purpose is described in turn below:
Unearmarked – This is the Council's working balance. It is held as a contingency to cover unexpected events that cannot be managed through normal in-year budget management. Although at £12m, it is a large sum of money, it only represents around 1% of the Councils gross spend.
PFI (Private Finance Initiative) – This is a short term reserve to smooth out the timing differences between the way the government pays PFI credits and the profile of payments to PFI service providers. The reserve is managed to ensure that at the end of all the Council's PFI schemes, the reserve will be exhausted. Funds from this reserve are available on a short term basis provided that they are paid back before they are needed by PFI schemes. This reserve will increase substantially in the early years of the Highways PFI scheme due to the size of the credits applicable to the scheme.
MSF (Major Sporting Facilities) – This reserve exists to align the profile of MSF repayments to the Council's budgeting cycle and ensures that future MSF repayments are less likely to result in budget issues for the Council. The reserve is managed to ensure that at the end of the MSF repayments, the reserve will be exhausted. Funds from this reserve are available on a short term basis provided that they are paid back before they are needed to support MSF repayments.
Earmarked – These are amounts set aside for specific purposes and include Schools Balances, LABGI and LPSA. It is important that the validity of the earmarked reserves and their level is questioned on at least an annual basis to ensure that they are still required and fit for purpose.
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Invest-to-Save – This reserve represents the balance on the Council’s Invest-to-Save projects. In the early years, this will be in deficit – supported by the temporarily available reserves, and in later years a surplus is planned which can be used to support the Revenue Budget, finance new projects or a combination of the two.
9.2.1 Risk Based Reserves Strategy The Authority has managed its reserves via the Risk Based Reserves Strategy for a number of years. The overall main aim of this strategy “is to ensure that the reserves held are adequate for the risk faced by the Authority“. This strategy considers the reserves available to the Authority, including the temporary reserves where appropriate, against a judgement of the risk facing the Council based on the Corporate Financial Risk Register (see 7.1.1).
9.2.2 Overview of Reserves The following chart shows actual and forecast reserves for the Council over the period of this strategy. Temporary reserves for PFI and MSF are excluded from this analysis.
The two lines on the chart show the position with and without the current Invest-to-Save programme. This illustrates how the project stage of the OTP uses reserves temporarily and then replenishes them over the period of this strategy. The black line shows the replenishment of reserves after up to £8m per year has been taken out of OTP benefits to support the Revenue Budget as shown in section 8, meaning that the true impact of OTP is significantly more beneficial than shown below.
Movement in Reserves - Medium Term View
80,000 Reserves 70,000 With Invest- to-Save
60,000 Reserves Without 50,000 Invest-to- Save 40,000 £000
30,000
20,000
10,000
0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Year The chart above shows timescales relevant to this strategy, the chart below extends these timescales to show the impact of Invest-to-Save over a longer period:
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Movement in Reserves - Long Term View
120,000
100,000
Reserves 80,000 With Invest- to-Save 60,000 £000 Reserves 40,000 Without Invest-to- Save 20,000
0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Year
Further detailed reserves reporting and an update on each of the OTP projects will be included in the 2009/10 Budget Report.
9.2.3 Invest-to-Save Regular reports on the invest to save fund, and each component scheme, are made regularly to the Organisational Transformation Board. As you would expect at this stage the reserve is in deficit as the majority of the schemes are still in the initial stages. Some of the larger projects begin to pay back in 2009/10 and it is essential that the savings are accurately captured to make both the necessary contribution to the revenue budget and to repay the invest to save fund.
9.2.4 PFI As previously mentioned the Council has been successful in its bid for a Highways PFI scheme that is due to start in August 2011 (see 3.3.3). In common with all PFI schemes the amount of unitary charge payable in the early years is less than the PFI credits received. Given the significant size of the Highways scheme the surplus that will be generated in the early years will increase the PFI reserve considerably peaking at just over £100m by the end of 2018.
10 CAPITAL STRATEGY
The Council’s capital programme consists of four main elements:
o Neighbourhoods Capital Programme, incorporating Decent Homes and Housing Market Renewal
o Building Schools for the Future
o Local Transport Plan
o Corporate Resource Pool
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Each of these programmes has its own funding arrangements and issues. Below is a summary of each programme together with relevant financial considerations.
The Council’s Capital Programme is under review in the light of the downturn in the property market and further work will be undertaken with Members in November in the run-up to the 2009/10 Capital Budget process.
10.1 Neighbourhoods Programme The Neighbourhoods Capital Programme is dominated by the Decent Homes programme and Housing Market Renewal. 2009/10 is the penultimate year of the Decent Homes programme and the mid point in what is potentially the last three years of Housing Market Renewal.
Resources to support these and other activities are reducing and tightening up as a result of lower capital receipts and Right to Buy (RTB) sales. Continuing pressure in the money markets will further slow RTB sales.
In the longer term, post Decent Homes, the future issues in terms of stock condition and maintaining the value of the current programme are being addressed. This longer term horizon is the subject of a major national review of the housing finance regime. Officers from Sheffield are closely involved in this Review with a view to optimising our ability to influence the outcome. The Review is programmed to report in spring 2009.
10.2 Building Schools for the Future The government’s Building Schools for the Future (BSF) programme is intended to run over a 10-15 year period.
Sheffield has 34 secondary schools, of which two are Academies and seven are SEN schools with secondary aged pupils. Sheffield City Council was approved by the Government for BSF Pathfinder status in February 2004, along with three other local authorities. The government’s Building Schools for the Future (BSF) programme is intended to run over a 10-15 year period. In addition to the BSF programme twelve Sheffield schools have been rebuilt under Private Finance Initiative (PFI) since 1997.
As part of Phase 1 of BSF funding, construction at four schools, Newfield, Talbot Special Educational Needs School, Silverdale and Yewlands began in March 2007, with the schools due to be open in January 2009; the first phase of Yewlands will be open in September 2008. The full BSF programme in Sheffield is scheduled to be completed in September 2012 and its value is approximately £400m. A further five schools in Phase 1 will be designed and developed over the next two years. Proposals for BSF Phase 2 are in the process of being developed and will be subject to consultation and then approval by the Government. At this stage there is an affordability gap of £25m over the life of the programme which will need to
Page 40 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 be resolved through a combination of additional funding and/or savings. The indicative timetable for the whole BSF programme in Sheffield shows a target completion date of September 2012, by which point, the estimated value of investment will be nearly £400 million. The phase 2 funding also includes £14m for ICT only at the existing PFI schools.
10.3 Local Transport Plan The Department for Transport (DfT) have given clear guidance that it expects LTP funds to be allocated based on strategic priorities rather than pro-rata to population. South Yorkshire Partners have agreed to adopt this basis bringing it into line with other excellent rated authorities. 50% of the allocation will be held by the Passenger transport Authority (PTA) for the strategic fund. Previously reported cost increases connected to the Inner Relief Road will also require final resolution as part of the 2009/10 capital programme.
The implementation of the Highways PFI will require the authority to opt out of the LTP highways maintenance funding but the replacement PFI credits will compensate for this.
10.4 Corporate Resource Pool The Corporate Capital Strategy (CGS) is part of the Council’s Medium Term Financial Strategy. As part of the CGS process in recent years, a Corporate Resource Pool (CRP) has been created, mainly from capital receipts, which enables some capital priorities to be tackled that would not have been otherwise affordable. Capital Receipts from whatever source can be earmarked for specific directorate spend after conscious and evaluated decisions.
Directorates are asked to submit bids for funding from the CRP, and the aim is to develop a methodology that is consistent across all directorates and that will identify priority schemes for which no other funding streams exist. This process is considered over a three year cycle.
The CRP available for distribution after allowing for targeted and passported elements of the Government’s capital settlement is circa £7m per annum. This figure is supplemented by using capital receipts from asset sales where possible.
However, as a result of the recent economic downturn, and its impact on the property market where property valuations have reduced, there will be a reduction in capital receipts. Therefore, with the expectation of a reduction in capital receipts, pressures on bid selection and criteria will increase. Furthermore, decisions will have to be made as to whether or not properties are put up for sale i.e., committed schemes, health and safety, to match time limited funding.
The overall programme for the Authority for this year and the next two years is balanced and is summarised in the following table:-
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2008/09 2009/10 2010/11 £'000 £'000 £'000 Expenditure Chief Executive's 3,973 2,742 1,640 Children and Young People 75,649 57,763 30,922 Neighbourhoods and Community Care 181,310 141,145 107,037 Development, Environment and Leisure 53,293 15,691 14,727
314,225 217,341 154,326
Funding Borrowing 117,612 96,403 54,455 Grants & Contributions 161,083 94,686 81,487 Capital Receipts 34,777 26,188 18,384 Revenue 753 64
314,225 217,341 154,326
Balance - - -
11 HOUSING REVENUE ACCOUNT
The income and expenditure of the housing revenue account relates specifically to the provision of the Council’s housing stock. As with the medium to long term housing capital investment issues, the medium to long term horizon for the HRA is inevitably linked to the national housing finance review.
11.1 Income Strategy As shown in section 5 there are two main sources of income for the HRA, council housing rents and other council housing income which includes the government subsidy and funding from the major repairs allowance. There is little flexibility in influencing the income for the Housing Revenue Account as the housing rents have to be calculated in accordance with Government requirements on rent restructuring and both the subsidy and major repairs allowance are provided by the Government.
11.2 Expenditure Strategy The main areas of expenditure are repairs and maintenance and the management costs, both Sheffield City Council and Sheffield Homes.
11.3 Overview Financial Projections In the shorter term, current HRA modelling shows that a broadly balanced budget can be achieved in 2009/10. However, annual ongoing savings of around £2m pa are required to keep it in balance from 2010 onwards. Summary HRA financial information, as reported to Cabinet on 29th January 2008, is attached in the appendices at 17.
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11.4 Risks affecting the HRA The position outlined in appendix 21 is heavily subject to future housing subsidy settlements not producing any major loss in resources. The underlying pressure on day to day repairs and maintenance still remains high despite the additional investment in this area in the 2008/2009 budget.
The increase in fuel prices is increasing the costs of the District Heating scheme which is impacting on the costs to customers.
Finally, even though the HRA overall is generally in balance, Sheffield Homes initial projections on their future management fees are in excess of the fee envelope in the medium term model.
11.5 Reserves Although in the short term reserves are above the level determined the budget projections currently reduce these to £4m by 2011/12.
12 TREASURY MANAGEMENT STRATEGY
12.1 Overview
The Council’s borrowing and investing activities are strictly regulated by statutory requirements and a professional code of practice (the CIPFA Code of Practice on Treasury Management). The Council adopted this Code in 2003, and as a result adopted a treasury management policy statement. This adoption meets the requirements of the first of the treasury prudential indicators.
The Code requires an annual strategy to be reported to Council outlining the expected treasury activity for the forthcoming 3 years. A key requirement of this report is to explain both the risks, and the management of the risks associated with the treasury service. This requirement is met in detail as part of the annual Budget Report to the Special Council in March each year.
This section of the MTFS looks instead at the longer term principles that the Council needs to have in mind when undertaking borrowing and investing activities.
12.2 Economic Overview The Money Markets have been extremely volatile since September 2007 as a result of the credit crunch which has been affecting the global economy (which started with the collapse of the US sub prime mortgages). High medium term investment rates became available as banks needed cash to
Page 43 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 ease their liquidity difficulties as the inter-bank loans market virtually seized up due to banks being reluctant to lend to each other.
As the credit crunch worsened a number of banks have suffered crippling financial losses. Local authorities have been particularly affected with the Icelandic banks going into receivership and all their accounts being frozen. A considerable number of Local Authorities have money invested with Icelandic banks ranging from £1m to £50m. Due to bad press reports SCC took the decision to suspend all dealings with Icelandic banks in August 2007 and therefore have not been affected.
In order to prevent a full crash of the world economy various rescue packages have been introduced by a number of governments (US, UK, Europe, Germany and Ireland etc), to improve market liquidity and guarantee investor’s deposits.
12.3 Borrowing and Debt Strategy 2008/09 – 2010/11 The strategy to be adopted will be consistent with that approved following the introduction of the Prudential Code i.e. one of prudence; given the impact such borrowing has upon Capital Financing Costs.
It is currently projected that around £100 million will be required in 2008/09, £70 million in 2009/10 and £34 million in 2010/11.
As new borrowing incurs interest costs, a key element is how these are to be funded from the revenue budget. The borrowing strategy to be adopted, as described elsewhere in this report, is one of a cautious nature because of the revenue impact it may have. To this extent, therefore, new borrowing will only be incurred either where the Council receives government support for the additional interest costs of such borrowing (as in the case of borrowing to fund the Decent Homes Initiative), or, for invest to save schemes which can cover their revenue costs.
The net financing need, less the amount repaid (i.e. the minimum revenue provision) above will impact directly on the Council’s Capital Financing Requirement (which is a measure of the Council’s underlying borrowing need).
The Council is required to pay off an element of the accumulated General Fund capital spend each year through a revenue charge (the Minimum Revenue Provision or MRP), although it is also allowed to undertake additional voluntary payments.
The full Council is required to approve the Council’s MRP policy annually in advance of the year to which it relates. The Council’s approved MRP policy for 2008/09 is:
”For capital expenditure incurred before 1 April 2008 or which in the future will be Supported capital Expenditure, the MRP policy will be to
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follow existing practice outlined in the former CLG Regulations”.
”From 1 April 2008 for all unsupported borrowing the MRP policy will be the Asset Life Method. MRP will be based on the estimated life of the asset, in accordance with the proposed regulations (this option must also be applied for any expenditure capitalised under a Capitalisation Directive).”
The table below shows the forecast MRP based on the current forecast borrowing plans (CFR projections):
2008/09 2009/10 2010/11 £m £m £m Opening CRF (inc 1,176 1,256 1,290 supported borrowing)
Less Total MRP -15 -15 -15 Less Adjustments -4 -4 -4
Closing CFR 1,157 1,237 1,271
The Council must also set the following limits with regards to its overall accumulated outstanding debt position, which are:
The Authorised Limit – This represents the limit beyond which borrowing is prohibited, and needs to be set or revised by Members. It reflects the level of external debt which, while not desired, could be afforded in the short term, but is not sustainable in the longer term. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.
The Operational Boundary – This indicator is based on the probable external debt during the course of the year; it is not a limit and actual borrowing could vary around this boundary for short times during the year. It should act as an indicator to ensure the authorised limit is not breached.
The Council’s authorised and operational limits are shown in the table below:
2008/09 2009/10 2010/11 Estimate Estimate Estimate £m £m £m Authorised limit for external debt 1,200 1,250 1,250
Operational boundary for gross 1,050 1,150 1,150
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external debt
The Deputy Director of Corporate Resources, under delegated powers, will take the most appropriate form of borrowing depending on the prevailing interest rates at the time, taking into account the risks shown with any forecast. It is likely that longer term fixed rates will be considered if borrowing levels remain relatively low.
In consultation with the Council’s Treasury Management Advisors, the Council will consider borrowing for future years’ requirements if the current low interest rates are predicted to become less favourable at some point in the future.
In 2007/08 the PWLB changed the terms applied to PWLB loans, making it much less favourable for local authorities to generate savings by undertaking debt restructuring. However, the Deputy Director of Corporate Resources and treasury consultants will continue to monitor changes in prevailing rates which may allow opportunities to develop during the year.
Due to these changes in the terms applied to PWLB loans the Council has revised its previous guide of a maximum of 30% market borrowing to 35%.
The Council’s borrowing strategy will operate within the following framework:
• Maintaining an asset value to debt ratio of at least 2:1. • Not exposing the Council to large future borrowing needs at a time when interest rates may be high. • Minimising the impact of borrowing for the Decent Homes Initiative, on the Council’s debt financing costs. The receipt of additional Housing Subsidy mitigates the impact of new supported borrowing on the Housing Revenue Account. • Minimising the impact of new borrowing on General Fund costs (possibly by investing cash for greater than one year). • Restricting the extent of prudential borrowing under the Prudential Code to £5 million for Invest to Save schemes and a further £5 million as an alternative to lease finance should borrowing be more advantageous to the Council. • To delegate authority to the Deputy Director of Corporate Resources to undertake the overall Treasury Management function within the framework laid out in this report.
12.4 Investment Strategy 2008/09 – 2010/11
The primary principle governing the investment of temporary surplus cash balances is security, although the yield or return on the investment is also a
Page 46 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 key consideration. After this main principle the Council will ensure:
• It has sufficient readily accessible cash resources (i.e. which are highly ‘liquid’) and it will determine the maximum periods for which funds may prudently be committed.
• It maintains a policy covering both the categories of investment types it will invest in, and, the criteria for choosing investment counterparties with adequate security.
The Deputy Director of Corporate Resources will maintain a list of investment types the Council can utilise together with a list of the institutions and organisations with which it can invest (i.e. its ‘counterparty’ list).
The investment type and counterparty list is compiled based on independent credit rating criteria and has been compiled in conjunction with our advisors. It basically covers:
• The type of organisation.
• The maximum amount to be invested.
• The type of investment.
• The duration of the investment.
By applying these criteria it means that the Council will only invest in low risk institutions and even then, it will limit the amount which is invested with each. The Council will invest in a range of financial instruments including fixed rate investments and other instruments that offer a variable interest rate dependent upon market conditions. All investments will guarantee a full repayment of principle. Any proposed change to existing investment practices will be presented for approval in the 2009/10 Budget Report to Council.
The credit rating of counterparties will be monitored regularly. The Council receives credit rating advice from its advisors on a daily basis as and when ratings change, and counterparties are checked promptly. Any counterparty failing to meet the criteria will be removed from the list immediately by the Director of Corporate Resources, and if required new counterparties which meet the criteria will be added to the list at any time.
The following chart shows the amount of cash that has been invested with financial institutions over the last 18 months. At 1st October 2008 the Council had £157.8m invested with financial institutions on its counterparty list. The average interest rate was 5.6%. Balances are held for cashflow purposes and to ensure that any borrowing is done when interest rates meet our long term criteria rather than when the cash is actually needed. Slippage in the Capital Programme can also cause cash balances to be invested whilst projects catch up with spending profiles. By way of example, the balance at
Page 47 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 the end of March 2008 consisted of capital programme slippage and borrowing in advance of need for the 2008/9 capital programme which was completed in quarter 4 2008/9 when borrowing rates were low.
Short Term Investment Profile From 01 April 07 to 23 June 08
180
160
140
120
100 £m 80
60
40
20
0 Apr-07 May-07 Jun-07 Jul-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Date
13 GOVERNANCE STATEMENTS
13.1 Financial Implications The financial implications of the recommendations in this report are set out in the preceding sections of the report.
13.2 Personnel implications There are no personnel issues arising directly from the recommendations in this report, however, within individual Directorates spending plans there could be issues, which do have a direct impact on employees. Any decision that may have a personnel impact will be included and addressed as part of Directorates Budget Implementation Plans included in the Budget report submitted to Special Council on 6 March 2009.
13.3 Property Implications There are no property issues arising directly from the recommendations in this report, however, within individual Directorates spending plans there could be issues, which do have a direct impact. Any decision that may have a property implication will be included and addressed as part of Directorates Budget Implementation Plans included in the Budget report submitted to Special Council on 6 March 2009.
13.4 Legal Implications There are no legal issues arising directly from the recommendations in this report, however, within individual Directorates spending plans there could be
Page 48 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 issues, which do have a legal impact. Any decision that may have a legal implication will be included and addressed as part of Directorates Budget Implementation Plans included in the Budget report submitted to Special Council on 6 March 2009.
13.5 Equalities Implications There are no equality issues arising directly from the recommendations in this report, however, within individual Directorates spending plans there could be issues, which do have a direct impact on Equalities. Any decision that may have an equality impact will be included and addressed as part of Directorates Budget Implementation Plans included in the Budget report submitted to Special Council on 6 March 2009.
14 RECOMMENDATIONS
Cabinet is asked to approve:
• the revised objectives of the financial strategy as outlined in section 3.1 and consider any further objectives.
• the additional investment on the Outstanding Sheffield Programme detailed in section 3.3.6.
• the principles for Council Tax setting detailed in section 5.2
• the approach for the distribution of years two and three of the Area Based Grant, including Working Neighbourhoods Fund detailed in section 5.3.2.
• allocation of LPSA Reward Grant as detailed in section 5.3.3
• the development of a Fees and Charges strategy using the principles detailed in section 5.4.
• the treatment of the PCT contribution to Continuing Care costs detailed in section 5.5.2.
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15 APPENDIX – PERFORMANCE AGAINST FINANCIAL STRATEGY OBJECTIVES
Objective Current Position the level of reserves should always This has been achieved via the Risk Based cover a prudent estimate of the Reserve Strategy. As a result of the financial risk carried by the authority improvements made to the level of reserves now held together with borrowing supported by technical accounting changes relating to PFI we have established an invest to save fund. avoiding overspends The out-turn position for the past six years has been in balance.
maintaining a balanced Capital Balanced Programme anticipated for 2008/09 Programme and targeted priority to 2010/11 and a Corporate Resource Pool investment from the Corporate approved Resource Pool (CRP) integration of financial and service Closer relationship between Budget planning, performance management Implementation Plans and Service Plans. and risk management to set the lowest Council tax Council tax increases have been reducing consistent with maintaining priority over the last few years (see section 5.2) services. keep capital debt increases to a New borrowing generally has only been minimum undertaken when it has been accompanied by government support, when it has been on an invest to save basis, or as an alternative to operating lease finances where it has been shown to be financially advantageous.
Introduced a local prudential indicator to maintain the percentage of gross General Fund capital financing costs to net revenue expenditure to below 10%
Page 50 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12 improving Council Tax and rent Collection rates have been improving slightly collection rates over last few years. Need to expand and consider income collection as a whole for the Authority
identifying areas for improved Three year efficiency target of £37m achieved efficiency by the end of 2007/2008. Organisational Transformation programme and Service and Finance Reviews will help achieve future savings. getting best value from the Council’s Targets for annual capital receipts totals set property assets and monitored
aiming to achieving a positive report A score of 3 on Use of Resources was from external audit, achieving at achieved as part of the Council’s 4 star rating least 3 on Use of Resources and in 2007 sustaining overall score at 4 in CPA assessment
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16 APPENDIX – LPSA PERFORMANCE REWARD GRANT
Second Local Public Service Agreement: Financial Projection January 2008
£5,047,158.62 Claimed
£2,523,579 £2,523,579 March 2008 March 2009
£1,261,790 £1,261,790 £1,261,790 £1,261,790 Capital Revenue Capital Revenue
£444,745 £444,745 £444,745 £444,745 £817,045 £817,045 £817,045 £817,045 Safer Sheffield Safer Sheffield Safer Sheffield Safer Sheffield Sheffield City Council Sheffield City Council Sheffield City Council Sheffield City Council Partnership Partnership Partnership Partnership
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17 APPENDIX – HRA FORWARD FINANCIAL PROJECTIONS
2008/09 Forecast Outturn Recommended 2009/10 2010/11 2011/12 2007/08 Budget £££££ Repair and Maintenance 29,194,700 28,698,700 28,838,800 29,329,100 29,927,100 Flood Damage - June 2007 1,700,000 0 0 0 0 Management - Sheffield Homes 28,949,800 29,382,500 30,555,500 31,775,300 33,043,900 Management - SCC 9,544,200 9,566,400 9,949,100 10,347,100 10,761,000 Other 13,227,700 13,661,000 13,730,200 13,786,300 # 14,027,100
Rent and service charge loss 3,041,700 2,904,400 2,922,000 3,010,700 3,112,000
Bad debts 1,070,700 895,100 834,000 881,000 881,000
Capital financing costs 41,784,100 47,441,600 52,778,600 55,677,500 56,028,600 MRA 25,357,100 27,214,100 28,147,000 28,500,100 28,831,400 Ongoing savings achieved 0000(1,712,298 ) Total Expenditure 153,870,000 159,763,800 167,755,200 173,307,100 174,899,802
Rents 113,610,414 117,210,800 120,024,000 123,492,200 127,556,800 HRA subsidy 1,875,500 4,901,600 9,522,500 9,844,400 7,596,400
MRA 25,357,100 27,214,100 28,147,000 28,500,100 28,831,400
Other 10,847,700 9,603,000 8,870,820 8,810,600 8,831,800
Total Income 151,690,714 158,929,500 166,564,320 170,647,300 172,816,400
Surplus (cr) / deficit (dr) in the year 2,179,286 834,300 1,190,880 2,659,800 2,083,402 Ongoing savings required 000(1,712,298 ) (2,083,402 ) Revised surplus (cr) / deficit (dr) in the year 2,179,286 834,300 1,190,880 947,502 0
Balance b/fwd (9,151,968 ) (6,972,682 ) (6,138,382 ) (4,947,502 ) (4,000,000 )
(Surplus) /deficit in the year 2,179,286 834,300 1,190,880 947,502 0
Balance c/fwd (6,972,682 ) (6,138,382 ) (4,947,502 ) (4,000,000 ) (4,000,000 )
Page 53 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12
18 APPENDIX – COUNCIL TAX COMPARISONS – 2007/8 AND 2008/9
METROPOLITAN DISTRICTS 2007/2008 METROPOLITAN DISTRICTS 2008/2009
1 Trafford 986.52 1 Doncaster 1,027.50 2 Wakefield 986.62 2 Trafford 1,035.25 3 Doncaster 988.93 3 Wakefield 1,035.49 4 Dudley 1,009.23 4 Dudley 1,057.97 5 Leeds 1,016.16 5 Bradford 1,058.12 6 Bradford 1,035.34 6 Leeds 1,064.37 7 Solihull 1,049.66 7 Birmingham 1,072.53 8 Birmingham 1,052.53 8 Manchester 1,097.10 9 Manchester 1,070.34 9 Solihull 1,098.50 10 Tameside 1,086.14 10 Tameside 1,112.38 11 Knowsley 1,086.77 11 St Helens 1,116.14 12 St Helens 1,088.92 12 Knows ley 1,130.24 13 Barnsley 1,099.84 13 Wigan 1,134.54 14 Sunderland 1,101.97 14 Sunderland 1,138.87 15 Sandwell 1,111.78 15 Barnsley 1,142.73 16 Wigan 1,112.30 16 Sandwell 1,143.42 17 Kirklees 1,120.53 17 Bolton 1,152.99 18 Rotherham 1,121.26 18 Kirklees 1,154.27 19 Bury 1,124.52 19 Bury 1,162.75 20 Wirral 1,144.66 20 Rotherham 1,163.89 21 Rochdale 1,152.65 21 Wirral 1,184.68 22 Bolton 1,152.99 22 Rochdale 1,196.45 23 Sefton 1,156.38 23 Sefton 1,202.11 24 South Tyneside 1,186.01 24 Calderdale 1,217.63 25 Calderdale 1,187.95 25 South Tyneside 1,221.00 26 Liverpool 1,193.91 26 Sheffield 1,240.96 27 Sheffield 1,210.69 27 Coventry 1,245.44 28 Stockport 1,211.73 28 Liverpool 1,252.41 29 Wolverhampton 1,212.30 29 North Tyneside 1,264.85 30 Coventry 1,212.70 30 Stockport 1,266.26 31 North Tyneside 1,222.34 31 Wolverhampton 1,271.87 32 Walsall 1,246.87 32 Walsall 1,283.01 33 Newcastle upon Tyne 1,249.16 33 Salford 1,287.68 34 Salford 1,250.17 34 Newc astle upon Tyne 1,297.89 35 Oldham 1,312.94 35 Oldham 1,302.56 36 Gateshead 1,323.58 36 Gateshead 1,375.16
AVERAGE 1,156.88 AVERAGE 1,120.46
CORE CITIES 2007/2008 CORE CITIES 2008/2009
1 Leeds 1,016.16 1 Leeds 1,064.37 2 Birmingham 1,052.53 2 Birmingham 1,072.53 3 Manchester 1,070.34 3 Manchester 1,097.10 4 Liverpool 1,193.91 4 Sheffield 1,240.96 5 Sheffield 1,210.69 5 Nottingham 1,252.15 6 Nottingham 1,215.66 6 Liverpool 1,252.41 7 Bristol 1,223.00 7 Bristol 1,272.00 8 Newcastle upon Tyne 1,249.16 8 Newcastle upon Tyne 1,297.89
AVERAGE 1,153.93 AVERAGE 1,193.68
Page 54 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12
19 APPENDIX – TOP FIVE INCOME STREAMS FOR EACH DIRECTORATE
Budget 2008/09 Description £'000
Chief Executives 1. Court Costs Fees 1,350 Fees charged for the recovery of court costs from individuals for council tax. Locally determined. 2. Licensing Fees 969 Fees charged for the granting of licences to premises and individuals. Set within statutory guidelines. Fees charged for accessing the local land charges register and other local authority records. Statutorily and 3. Property Search Fees 888 locally determined. 4. Property Disposal Fees 882 Fees charged to the purchasers of Council land and property at auction or private sale. Locally determined. 5. Register Office Fees 588 Fees charged in connection with the Registrars function. Set within statutory guidelines. Neighbourhoods and Community Care 1. Residential and Nursing Home Statutory, mandatory charge for residential and nursing care. National Charging regime based on indivduals 18,547 Contributions ability to pay. Discretionary contribution for non residential services. Means tested under fairer charging legislation to reflect 2. Home Care / Day care / Transport 5,409 ability to pay. 3. City Wide Alarms 1,136 Charge for alarm system in individual homes. Locally determined. 4. Water Commissions 839 6.75% commission received from Yorkshire and Severn Trent water for collection of tenants water rates. 5. Private Sector Housing Admin Fees 268 Admin fees charged to cover costs of grants, search fees etc.
Development, Environment & Leisure 1. Car Park Fees and Charges 5,064 Locally determined. 2. Market Rents and Charges 3,468 Locally determined. 3. Planning Fees 3,226 Governed by legislation. 4. Veolia Contract Credits 2,605 Profit share, income from energy sales & tax credit. 5. Bereavement Services 2,391 Burial, cremation and monument sales.
Children & Young People - Other External Fees & Charges 1. Contract Services Sales 2,460 Sale of school meals, milk and other refreshments 2. Secure Accomodation 1,763 Funding from Youth Justice Board, technically a grant. 3. Extended Learning 997 Charges to users of music, outdoor and arts service. 4. Organisational Development 234 Charges for services to other authorities and fees for assessment centres 5. SESSA 67 Charges to other users for supply staff from internal supply agency Children & Young People - Schools 1. Donations and Sponsorship 3,518 2. Bank Interest 2,194 3. Sale of meals 1,789 4. Costs recovered - energy 1,017 5. Miscelleaneous Contributions 1,001
Page 55 of 56 Sheffield City Council Medium Term Financial Strategy 2009-12
20 APPENDIX – BREAKDOWN OF AREA BASED GRANT 2008/09 –
2010/11 Settlement Settlement Settlement 2008/09 2009/10 2010/11 £'000 £'000 £'000
Grants to be delivered via Area Based Grant
Children & Young People 14-19 Flexible Funding Pot 134 133 132 Carers - CYPD 514 548 582 Child and Adolescent Mental Health Services 932 979 1,023 Children's Social Care Workforce 183 182 181 Childrens Fund 1,627 1,627 1,627 Choice Advisors 53 53 53 Connexions 4,802 4,955 4,957 Education Health partnerships 112 112 112 Extended Rights to Free Transport 36 83 129 Extended Schools Start Up Costs 829 1,511 621 Positive Activities for Young People 1,561 1,561 1,917 Secondary national Strategy - Behaviour and Attendance 126 126 126 Secondary National Strategy - Central Co-ordination 266 262 263 Primary national Strategy - Central Co-ordination 329 328 328 School Development Grant (Local Authority Element) 2,615 2,615 2,615 School Improvement Partners 181 181 181 School Intervention Grant 123 123 123
Sustainable Travel General Duty 35 35 35 Teenage Pregnancy 344 344 344 Youth Taskforce 250 250 250 Child Death Review Processes 72 74 77 Young People Substance Misuse 141 141 141 15,337 16,295 15,889 Neighbourhoods & Community Care Adult Social Care Workforce (formerly HRDS and NTS) 1,562 1,601 1,641 Care matters White Paper 354 485 558 Carers - Community Care 2,055 2,191 2,326 Crime Reduction, Drugs Strategy and Anti Social Behaviour Mental Capacity Act and Independent Mental Capacity Advocate Service 282 355 340 Mental Health 1,662 1,745 1,829 Preserved Rights 2,425 2,324 2,229 Respect 413 258 0 Stronger Safer Communities Fund 545 545 545 Supporting People Administration 273 252 216 Working Neighbourhoods Fund 11,300 13,420 13,964 Supporting People 25,227 25,227 Learning & Disability Development 521 520 519 21,392 48,923 49,394 DEL Road Safety Grant 1,913 1,901 1,829 Rural Bus Subsidy 582 597 613 2,495 2,498 2,442 Corporate Cohesion 26 49 75 Local Enterprise Growth Initiative 5,057 5,050 4,917 Local Involvement Networks 263 263 262 Deprived Area Fund City Strategy Pathfinder 1,691 Preventing Violent Extremism 185 225 255 7,222 5,587 5,509
Grand Total 46,446 73,303 70,792
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