This booklet contains details of the 2006 Medium Term Financial Strategy (MTFS), comprising the following four main elements:

In 2006 the strategy will be updated over the summer and for future years it will be rolled forward each year at budget setting time.

The approach to the 2006-07 budget has been to maintain and where possible, enhance the investment in priority services whilst at the same time minimising the council tax increase.
Given the poor government settlement this could only be achieved by continuing to make efficiency savings and targeted disinvestment from lower priority services.  

The key features of the budget are:

The budget takes full account of the draft Medium Term Corporate Strategy.  This has recently been out to public consultation and is in the process of being amended to reflect the results of this and the contents of the Local Area Agreement.  Amendments to the corporate strategy will be taken into account when the MTFS is updated in the summer.

The final local government settlements for 2006-07 and 2007-08 were issued at the end of January.  This is the first time local authorities have been given information relating to their allocations for more than one year. The Government included an additional £305m formula grant nationally and also plans to provide support of £800m.  The details of this support are still unclear, but it is likely that it will be a combination of additional funding and reduced spending pressures.

A new grant allocation method has also been introduced referred to as the ‘four block model’.  In this method Formula Spending Shares (FSS) have been replaced by a Relative Needs Formula (RNF).  The Government’s aim is to shift the focus solely to the level of grant cash increase received by local authorities rather than notional spending and council tax increases assumed within the current grant methodology.  In addition schools will be funded by the new Dedicated Schools Grant rather than through mainstream funding.

The formula grant for England will increase by 3% in 2006-07 and 3.8% in 2007-08.  The increases for Leicestershire are 2% and 2.7% respectively based on the ODPM like for like comparison (the cash increase in formula grant in 2007-08 is only 0.8%).  In both these years the levels have been set at the floor increase for Education and Social Services authorities.  Without this floor there would be a reduction in funding of 1.5% in 2006-07 and an increase of 1.1% in 2007-08.  In total 17 counties received the floor increase in 2006-07.  Leicestershire County Council receives the fourth lowest formula grant per head of population in 2006-07, out of the 20 counties that do not fund the fire service (see Shire Counties Formula Grant per head of population 2006-07).

The new formula has significant redistributive effects over the medium term that the damping mechanism moderates in the short term.  Over a number of years Shire Counties (particularly those in the South East) and outer London Boroughs lose out with Shire and Metropolitan Districts and Unitary Authorities (particularly those in the Midlands and South West) gaining.

The County Council undertook consultation on the provisional budget through a survey which was also sent directly to members of the Citizens Panel.  The survey showed that over 80% of the 478 people who responded supported the County Council’s approach to keep the council tax increases down and invest in quality services by reducing expenditure in some areas and continuing efficiency savings.

The Scrutiny Committees and Commission received reports on the revenue budget and capital programme proposals. Comments arising from the meetings of scrutiny bodies were considered by Cabinet in formulating the final proposals.

The government confirmed that most schools funding will come in the form of a ring fenced grant to local authorities to be known as Dedicated Schools Grant (DSG).  This grant will continue to cover funding allocated directly to schools and funding that is retained by the local authority to support pupil led provision such as early years and excluded pupils.

The key elements of the Education settlement are:

Leicestershire will remain the lowest funded local authority per pupil in 2006-07 and 2007-08. This is because DSG is based on the 2005-06 level of expenditure and the increases in funding per pupil of 6.7% and 6.4% respectively are below the national average over the two years. See Dedicated Schools Grant per pupil 2006-07.

The approved budget totals £281m excluding Dedicated Schools Grant of £301m.  This represents an increase in net expenditure of 4.4%.  Growth totals £14.4m and savings and additional income account for £10.3m.  This increase in expenditure is financed by a minimum 2% increase in central government grant (after amending reports) and 4.5% increase in council tax.  The approved 2006-07 budget is summarised on page 35.

The budget is based on outturn prices and the following general inflation assumptions:-

   Pay @ 2.95%
   Additional employers pension contributions @ 1.2% of pay
   Running costs @ 2.5%

Overall inflation (excluding schools) is estimated to be £7.7m.  Where inflation exceeds the above figures this is shown as growth items.

The budget includes the full year effect of growth and savings decisions taken as part of the budget setting process in previous years and takes account of budget transfers.

In total £14.4m (net of certain specific grants and excluding schools) has been included in the budget to meet demand and cost increases, reduced income and for service improvements.

Details of growth items are shown on Growth and Savings approved by County Council, 22 February 2006.  The main growth items are summarised below:

The budget includes savings of £8.9m and increased income of £1.4m.  Cashable efficiency savings total £4.1m and equate to 1½% of the budget.  This is above the Gershon cash efficiency target of 1.25%.  The annual efficiency statement produced by the County Council will highlight both cash and non cashable efficiencies which are required to total at least 2.5% of the budget.  Non cash efficiencies mean that either a higher quality or volume of service can be provided with no increase in cost.  Details of savings are shown on  Growth and Savings approved by County Council, 22 February 2006.

The budget includes significant non-efficiency savings.  In this context, lower priority services have been identified.  These savings are required to restrict the council tax increase and enable investment in higher priority services.  The main savings in this category relate to environmental maintenance, concessionary travel and bus service contracts.

The main change is that bank and other interest has increased by £1.7m mainly reflecting higher cash balances.  This continues the trend experienced in recent years.  Capital financing costs are expected to increase by £3.6m to reflect the increase in the capital programme.  This reflects both an increase in borrowing, in theory,  ‘supported’ by central government and ‘unsupported’ borrowing that is met by council tax.  ‘Supported’ borrowing causes the County Council particular difficulties as the increases in formula grant is well below the extra cost of supported borrowing.  As a result some of the cost of ‘supported’ borrowing is effectively met by council tax.

The County Council is expecting additional one-off funding from both the performance reward grant for the Public Service Agreement and income from the Local Authority Business Growth Incentive (LABGI) scheme of £2m (£1m capital and £1m revenue) and £600,000 respectively in 2006-07.  Further one-off funding is also likely to be received in 2007-08.  These funds will be used to pump prime the new local area agreement (LAA) and also finance the Corporate Change Management Programme. The Programme is aimed at ensuring the County Council can deliver on the significant change agenda that includes a wide variety of projects including; access to services, delivering efficiency savings and improving procurement procedures.  At present the programme is being developed and as a result existing and new corporate projects are being prioritised.

The following table sets out the expected capital resources available to the County Council.  These include resources made available by the Government for the main programme areas, third party contributions and discretionary resources generated by the County Council (principally capital receipts).

The financing of the programme in 2006-07 to 2008-09 will require the Authority to enter into borrowing which is not (even in theory) supported by Government grant and has to be met from council tax.  Over the three year period £15.1m of unsupported borrowing is expected to be required.

The key issue with respect to the Prudential Code is the revenue impact and affordability of borrowing. The projections below show the increase in the capital financing budget over the next three years.

The full programme of prudential indicators is shown on Prudential Indicators.  These indicators include scope to borrow to fund capital expenditure where existing budget provision is available to meet borrowing costs.  This will, for example, enable the Authority to borrow rather than lease when this is financially beneficial to the Authority and there is existing budget provision.

The formula grant is expected to increase by £1.5m in 2006-07 and £0.6m in 2007-08 which is significantly lower than the increase in capital financing costs and explains, in part, the tight financial position of the County Council over the medium term. The lower increases in capital financing costs in later years reflect both decreasing levels of unsupported borrowing, the fact that central government support is shifting from supported borrowing to grant and that borrowing has been raised early.  Over the three year period unsupported borrowing reduces from 20% of borrowing in 2006-07 to 10% in 2008-09.

Using improved Asset Management Planning, the County Council will seek to maximise capital receipts over the medium term in order both to minimise the need for prudential borrowing and to finance capital investment in priority services.

The proposed programme is summarised in the table below and shown in detail in the capital programme section of this book.

* Education resources include devolved formula capital.

The programme reflects the draft priorities within the medium term corporate strategy and the Capital Strategy 2006-2010 . The capital strategy sets out the key priorities for the capital programme for the next four years and the overall approach to capital investment.

The Education Capital Programme will focus on five priority areas:-

The costs of many of the major 2007-08 and 2008-09 projects in the programme including the new secondary school, Children’s Centres and the new area special school will be dependent on more detailed feasibility and design work.  The programme is currently based on either available funding or a desktop estimate.

In addition to the main programme devolved formula capital will increase by £2.2m to £11.3m.  The majority of this increase (c.£1.7m) results from a reallocation by the DfES of Schools ICT infrastructure grant.  These resources are allocated directly to schools, mainly on the basis of pupil numbers.  This means a 1,200 place secondary school will receive £126,800 in 2006-07.  A 240 place primary school will receive £31,600 in 2006-07.

The key influence on the transportation capital programme is the second five year Local Transport Plan (2006 – 2011).  The consultation period for the draft plan is due to end in the middle of January and the final version approved in March.

The provisional plan has been produced and assessed as ‘promising’ by the Government Office of the East Midlands (GOEM).  This assessment along with the assessment of the annual progress report (APR) is important as up to 25% of an authority’s integrated transport block allocation is dependent on the quality and delivery of LTPs.  As the County Council’s APR has been assessed as ‘excellent’ the integrated transport block allocation is increased by 12.5% to £6.2m.

The majority of the LTP is for capital maintenance (£9.6m).

In total LTP funds of £15.9m have been allocated compared to £15.2m in 2005-06.  A further allocation of £1.1m has been made for capital maintenance on the recently de-trunked A6 and A47.

The most significant project within the LTP is the park and ride scheme at Enderby.  This is forecast to be completed by the summer 2010 at a cost of £9.2m.  It will be financed by a combination of LTP, developers, prudential borrowing, City Council contributions and capital receipts.

The settlement does not include any funds for major transportation schemes. The East Midlands Regional Assembly is due to endorse a proposed programme in the middle of January in line with the new Government process of regional funding allocations. At this stage it seems likely that in the first five years the programme will include both the Earl Shilton by pass and Loughborough integrated transport scheme. This programme will then be considered by the Department of Transport. The capital programme will need to be amended to take account of any approved schemes later this year.

The programme also includes other schemes funded from capital receipts and prudential borrowing.  This includes the advance design work for the Loughborough integrated transport scheme and Melton Mowbray bypass and street lighting column replacement.

The three year programme is aimed at improving household waste and recycling sites.  The programme includes funding for completion of the improved site at Oadby, a new site at Sileby and funds, in 2007-08, to start work on improving one site from Lount, Melton Mowbray or Kibworth.  A block allocation has also been included for general improvements to sites.

The main focus of the programme continues to be progressing the learning disability review with new or upgraded facilities at Melton, Market Harborough, Hinckley, Lutterworth and North West Leicestershire. This is in addition to the new facilities in Wigston and Charnwood included in the 2005-6 programme.

The programme continues to focus on both the refurbishment and replacement of libraries with new libraries planned at Earl Shilton, Leicester Forest East, Oadby, Kirby Muxloe, Braunstone and Mountsorrel over the next three years.

The programme also includes a £0.5m contribution for the extension of the Ashby Canal.  This £13m scheme is heavily dependent on external funding that will be sought from the national lottery and other organisations over the next couple of years.  The County Council’s contribution is for advanced design work.

The main focus is continuing the development of ICT infrastructure to support the increasing number of services delivered to the public electronically.  Resources have also been allocated to meet the Disability Discrimination Act requirement to improve access to County Council buildings.

Resources have also been allocated to meet the potential compensation in relation to the existing ESPO warehouse and expenditure arising as a result of relocation.

A block allocation is included for the Corporate Change Management Programme in 2006-07 and 2007-08.  The capital programme will be amended following the current review of corporate priorities as a result of the change management programme.   This means that the current priorities for this capital funding (BABSI, electronic and document records management system, contact centre and E.procurement) could change.

The Local Government Act 2003 requires the Council’s Chief Finance Officer to report on:

a)  The robustness of the estimates included in the budget; and
b)  The adequacy of the proposed financial reserves.

The Director of Resources provides detailed guidance notes for departments to follow when producing their budgets.  As well as setting out certain assumptions such as inflation, these notes set a framework for the effective review and compilation of budget estimates.  As a result, all estimates have been reviewed by appropriate staff in departments.  In addition, each Departmental Head of Finance has identified the main risk areas in their budget and these have been evaluated by the Director of Resources.  In producing the budget due account has been taken of the Risk Management Strategy.

The forecast balance on the County Fund at the end of 2005-06 is £8.5m, which represents 3% of the budget (excluding dedicated schools grant).  This assumes a £2m contribution from this year’s underspend.  At present it is assumed that the balance of underspend will be treated as carry forwards for services.  The Supporting People grant in 2006-7 may be supplemented by a carry forward of underspend.

The policy continues to be to maintain a level of County Fund consistent with the risks faced by the County Council.

The main identifiable financial risks to the County Council over the medium term are:

In addition to these identifiable risks other unforeseen factors could result in significant financial loss.

If the County Fund exceeds the risk assessed level it should be used in the first place to fund non-recurring expenditure.  In 2006-7 some limited revenue costs arising from restructuring may be met from County Fund. The policy for both the County Fund and earmarked reserves is set out in the Reserves Policy.

Other reserves and balances have been reviewed and details are shown on Estimated Financial Reserves. The expected balances as at 31^st March 2006 and 2007 have been estimated.  The extent to which the balances will be used in the medium term has also been estimated where possible.

There is obviously a great deal of uncertainty in terms of the expected movement on the balance of some reserves over the medium term. For example, one of the largest reserves is for Insurance. The amount that will be required to settle claims in any one year varies significantly and therefore it is not possible to project forward balances with any certainty.

Local Management of Schools allows schools and colleges to retain their accumulated balances in relation to delegated budgets.

Balances carried forward from 2004-05 totalled £21.3m of which the uncommitted sum as analysed by schools under the consistent financial reporting requirements of the DfES, totalled £9.4m. This is an increase from the uncommitted balance of £8.4m at 31^st March 2004.

In part as a response to DfES guidance on schools balances the Schools (Funding) Forum has recently approved a scheme to begin in the next financial year to restrict the level of the uncommitted balances to within certain limits over a three year period.  Schools should not increase their level of uncommitted balances over this monitoring period, any such increase would be subject to a clawback arrangement.

Overall it is not expected that the level of uncommitted balances will change significantly over the next few years, as any possible clawback will not be operative until 2009-10.

Having taken account of the overall control framework, budget provisions included for inflation and growth to reflect spending pressures, assurance can be given that the estimates are considered to be robust and take account of the key factors that influence expenditure patterns.

Given the basis on which the budget is prepared, taking account of the main risks faced by the County Council, making an allowance for potential unforeseen eventualities and the continuing focus on financial control, the level of reserves including the County Fund is considered to be adequate.

The Cabinet and Resources Scrutiny Committee receive regular revenue and capital monitoring reports as well as budget and outturn reports and external audit reports. In addition, further financial governance reports are considered by both the Corporate Governance Committee and Constitution Committee.  This reporting enables members to satisfy themselves about both the financial management and standing of the County Council.  These reports will continue but will be supplemented by performance indicators and targets set out on Financial Management Performance Indicators.  The aim of reporting this additional information is to improve the already strong financial governance arrangements of the County Council.

The approved budget for 2006-07 is based on a 4.5% Council Tax increase.  This results in Council Tax for a Band D dwelling increasing from £890.40 to £930.47.

The Government made it clear that it expected average Council Tax increases to be less than 5%.  It has been explicit in its threat to use its reserve powers to cap authorities that it considers have been excessive in their proposed Council Tax increase.

As a result of the introduction of the dedicated schools grant over 70% of the budget will be met from council tax compared with around 35% in 2005-06.

This Medium Term Financial Strategy includes both a three year capital programme and a summarised three year Revenue Budget Projection.  Medium term planning has been helped by the ODPM issuing settlements for 2006-07 and 2007-08. As stated earlier, the relatively low increase in formula grant of 2% in 2006-07 and 2.7% in 2007-08 (on an ODPM calculated like for like basis) and the prospect of a further ‘floor’ increase in 2008-09 means that the County Council will continue to operate within a very tight financial environment over the medium term. The final settlement received at the end of January shows a formula grant unadjusted cash increase in 2007-08 of only 0.8% or £0.6m, which is a significant reduction on the consultation figures.

The Medium Term Corporate Strategy (MTCS) has been developed alongside this financial strategy and resources have been included for the key priorities including learning disability services, children’s service, libraries and waste. In addition to service investment included in the 2006-07 budget, which also feeds through into the 2007-08 and 2008-09 budgets, a further £0.5m has been included in both the 2007-08 and 2008-09 budgets.  This will be used to address priorities in future years.  A significant element of the investment in these and other services is taking place through the capital programme. The capital financing costs will therefore also be a significant budget pressure that will need to be restricted by maximising capital receipts, seeking external funding and partnership working.

The main demand and cost pressures over the medium term continue to be within Social Services and Waste Management.  In Social Services they relate to home care and residential and nursing placements.  The main pressure in Waste Management relates to the landfill tax and recycling costs.  Other pressures include capital financing, employee increments, superannuation increases and the impact of traffic management legislation. The main service pressures anticipated to be faced by departments over the next few years are summarised on Analysis of Growth in 2007-08 and 2008-09.

One element of the County Council’s Corporate Change Management Programme is to ensure we can continue to generate cash efficiency savings of circa 1¹/₄% (£3.4m) per annum.  However, efficiency savings alone will be insufficient to deliver a reasonable level of council tax increase.  Therefore at the same time lower priority service savings will need to be identified building on those proposed in this year’s budget.  At this stage the following service areas have been identified as having potential to generate further savings: education transport, adult and community learning, residential care for older people, Social Services charging, regeneration and environmental action, family centres, support for the Ivanhoe Line, development control, grants, country parks, arts and outreach, money advice and library service for education.  In 2007-08 and 2008-09 £3.2m has been included for lower priority savings. It is vital that work on reviewing these areas is progressed early in 2006-07.

The ability to generate efficiency and other savings underpins the aim to invest in priority services and at the same time aim to restrict the level of Council Tax increase in 2007-08 and 2008-09.  The Council’s Strategy with respect to income will be:-

The revenue budget projections assume a council tax increase of 5% in both 2007-08 and 2008-09.  Though this reflects the very difficult financial position of the County Council in these years, as a result of a very poor settlement for 2007-08 with similar prospects for 2008-09 and rising demands and costs for key services, this is an assumption that will be revisited at key stages through the financial planning process.

The provisional revenue budget will be updated in the summer.  The main changes will be:

The Medium Term Financial Strategy underpins the corporate strategy and the future direction of the County Council.  It is very much a “live” document that will be updated at regular intervals and in the future will include more detailed financial information on departmental budgets.

An Annual Investment Strategy must be approved in advance of each financial year by the full Council. See the combined Treasury Management Strategy Statement and Annual Investment Strategy for 2006-07.

The range of investment options for which approval was sought was identical to those approved last year.  The Treasury Policy Statement lays out the types of organisation to which the Council is authorised to lend, and approval was sought to increase the maximum amount that the Council can lend to certain very highly credit-rated organisations.  It is considered that this does not make a material difference to the negligible risk of default, and the changes have been supported by the Council’s treasury management advisors.  The increase in available balances for lending and the less active approach taken recently within the London Money Market by a number of acceptable counterparties has made this increase in limits a necessity if optimal performance is to be maintained.

Key elements of the Treasury Management Strategy can be summarised as follows:

(i)  Due to the historically attractive interest rates available for borrowing, the cash requirement for the majority of the 2006-07 Capital Programme has already been financed.

(ii)  It is possible that no further borrowing will be undertaken in 2006-07, although if rates remain attractive consideration will be given to pre-financing at least part of the 2007-08 Capital Programme.

(iii)  The attractiveness of interest rates will be the key consideration in any borrowing decision, although it is accepted that the current portfolio profile would benefit from the introduction of some medium (5-20 year) debt.

(iv)  Going forward it is likely that debt rescheduling exercises are more likely to save relatively small amount of money, but be carried out more regularly.  This does not exclude the possibility of larger savings, but such savings would require a larger swing in interest rates than has been seen in recent years.

(v)  Current very low long-term interest rates are considered to be an anomaly brought about by a demand/supply imbalance. This anomaly is ultimately expected to correct itself, although this will not necessarily happen quickly.

(vi)  Borrowing and lending strategies must retain significant flexibility if long-term net interest costs are to be minimised.

(vii)  The credit ratings of the institutions to whom the Council will lend remain very high, and the risk of default is considered to be negligible.

This has been my first budget at Leicestershire having joined the County Council as Director of Resources in autumn 2005. I am grateful to the staff in all departments involved in the process for their effort, commitment and application.

Brian Roberts
Director of Resources
May 2006