budget report 2015/16 - london borough of...
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BUDGET REPORT 2015/16
CONTENTS SECTION 1 - REVENUE BUDGET AND COUNCIL TAX 2015/16
1. INTRODUCTION
2. COUNCIL TAX 2015/16
3. ANNUAL LOCAL AUTHORITY FINANCE SETTLEMENT
4. BUSINESS RATE RETENTION
5. SPECIFIC GRANTS
6. DELIVERY OF THE CORPORATE PLAN
7. MEDIUM TERM FINANCIAL STRATEGY
8. GROWTH
9. SAVINGS
10. PENSION FUND
11. NEW HOMES BONUS
12. DEDICATED SCHOOLS GRANT
13. REVENUE BUDGET SUMMARY
14. RISK MANAGEMENT
15. KEY RISKS
16. BALANCES AND RESERVES
17. CONSULTATION
18. FINANCIAL GOVERNANCE AND CONTROL
19. COLLECTION FUND
20. SETTING THE DEMAND ON THE COLLECTION FUND
21. GREATER LONDON AUTHORITY (GLA) PRECEPT
22. COUNCIL TAX SUPPORT
23. LOCAL WELFARE PROVISION
24. FEES AND CHARGES SECTION 2 – HOUSING REVENUE ACCOUNT (HRA) BUDGET 2015/16 AND REVISED 3 YEAR HOUSING CAPITAL PROGRAMME
25. BACKGROUND
26. HRA BUDGET STRATEGY AND KEY OBJECTIVES
27. HRA BUDGET 2015/16
28. HRA CAPITAL INVESTMENT PROGRAMME SECTION 3 - LONDON BOROUGH OF HOUNSLOW CAPITAL PROGRAMME
29. OVERVIEW OF CAPITAL PROGRAMME SECTION 4 - TREASURY MANAGMENT STRATEGY, INVESTMENT STRATEGY, PRUDENTIAL INDICATORS AND MINIMUM REVENUE PROVISION POLICY
30. PURPOSE
31. TREASURY MANAGEMENT ANNUAL STRATEGY 2015/16
32. BASE PORTFOLIO POSITION
33. PROSPECTS FOR INTEREST RATES
34. ECONOMIC BACKGROUND
35. INTEREST RATE FORECAST
36. BANK RATE
37. LONG TERM PUBLIC WORKS LOAN BOARD (PWLB) RATE
38. CAPITAL FINANCING STRATEGY
39. GENERAL FUND BORROWING REQUIREMENT
40. GENERAL FUND BOROWING STRATEGY
41. HOUSING REVENUE ACCOUNT BORROWING REQUIREMENT
42. HOUSING REVENUE ACCOUNT BORROWING STRATEGY
43. POLICY ON BORROWING IN ADVANCE OF NEED
44. DEBT REPAYMENT AND RESCHEDULING
45. ANNUAL INVESTMENT STRATEGY
46. THE MINIMUM REVENUE PROVISION (MRP) STRATEGY
47. POLICY ON THE USE OF EXTERNAL SERVICE PROVIDERS
48. TRAINING
49. RISK
50. HIGHWAYS MAINTENANCE PFI (PRIVATE FINANCE INITIATIVE) - TREASURY RISK
51. TREASURY LIMITS AND PRUDENTIAL INDICATORS
52. FINANCIAL IMPLICATIONS
SECTION 1- REVENUE BUDGET AND COUNCIL TAX 2015/16 1. INTRODUCTION 1.1 The Council has a duty under the Local Government Finance Act 2003 to set a
balanced budget. Our ability to do this is becoming increasingly challenged due to further cuts to our grant income and increasing demand on our services. However despite these challenges, the Council remains focussed on delivering quality services to the community it serves and although during the course of this budget setting process difficult choices have been made, the Council has a clear corporate plan and list of priorities that it will continue to support.
1.2 The report sets out the Council‟s proposed 2015/16 Budget and is directly derived
from the Council‟s Medium Term Financial Strategy that was approved by Borough Council in November 2014. The Budget again proposes a freeze to the Council Tax charge which is the ninth year in succession that the charge has not increased.
1.3 The budget realises the impact of a £13.7m reduction in revenue support grant for
2015/16 and proposals to make savings to enable us to balance the budget were approved by Borough Council in November 2014 with a further tranche presented for approval this evening within a separate report on the agenda. This is within the context of £59m savings that will need to be delivered up to and including the 2018/19 financial year as outlined in the Medium Term Financial Strategy. In addition to these revenue budget pressures, the Council also faces a significant challenge in funding its Capital Programme with the statutory requirement to create new schools places for Hounslow‟s expanding population. Mechanisms for managing our Capital Programme financial risks are summarised within this report but were outlined in full within a report to the February Cabinet.
1.4 The proposed budget presented is prudent in the context of sound financial
management and longer term financial planning. The Council continues to operate an enabling yet transparent and controlled financial control framework and the Council works hard to maximise the resources available to support front line services to our residents and businesses whilst continuing to support our statutory functions. We look forward to working with all our stakeholders to ensure we deliver our 2015/16 objectives within this budget.
2. COUNCIL TAX 2015/16
2.1 The council, elected in May 2014, is committed to limiting the burden of council tax
on the borough‟s residents. For 2014/15, Hounslow‟s element of the band D council tax was £1,079.77, making Hounslow the 19th lowest in London. The comparative figures are shown in the chart below.
2.2 For 2015/16, it is recommended that the Hounslow element of the council tax is
frozen at 2014/15 levels. At band D, this would leave the council‟s share of the council tax at £1,079.77. This continues the council‟s approach to keeping the council tax as low as possible.
2.3 The Mayor of London has published his 2015/16 draft revenue budget for
consultation. The Mayor‟s budget proposes a reduction in the Mayor's band D council tax precept of just over 1.3% from £299.00 to £295.00 in 2015/16 for council taxpayers in the 32 London boroughs.
2.4 Based on the above recommendation and subject to the approval of the Mayor‟s
budget and GLA precept, this would give a combined band D council tax total of £1,374.77.
3. ANNUAL LOCAL AUTHORITY FINANCE SETTLEMENT
3.1 The provisional local government finance settlement was published on 18
December 2014 and follows on from the Autumn Statement released on 3 December 2014.
3.2 The headline figures for Hounslow announced a 1.9% reduction in revenue
spending power for 2015/16, but this masks the actual funding reductions by including income sources earmarked for the implementation of the better care fund. The council‟s 2015/16 settlement funding assessment, which combines Revenue Support Grant and DCLG‟s assumed business rates income for Hounslow, results in a 13.1% cut compared with 2014/15. These levels are in line with the assumption set out in the council‟s medium term financial strategy.
3.3 In cash terms, Hounslow will receive £13.6m less Revenue Support Grant than
last year, this reduction is partially offset by increases in retained business rates income. Together with council tax these are the main un-ring-fenced funding sources for Hounslow. Below is a graph setting out the estimated „funding per resident‟ across London Boroughs for 2015/16. This shows that Hounslow‟s growing population combined with funding cuts results in Hounslow having less funding per resident that most of our London neighbours.
4. BUSINESS RATE RETENTION
4.1 2015/16 is the third year of the new business rates retention system which
provides Hounslow with a share of any increases in business rates resulting from an upturn in the local economy. Normally business rate bills increase annually by the September RPI figure, however for the second year running this has been capped at 2% by central government. The Government have also extended small business rate relief, and increased the discount to help the high street from £1,000 to £1,500 on selected premises. These reductions in business rates affect the level of retained income received by the council. As they are a direct result of government changes, the council is compensated by a specific grant paid by central government.
4.2 Based on the Non Domestic Rates Return (NNDR1), Hounslow estimates collecting £156.123m of business rates in 2015/16. Hounslow will retain 30% of the income, pass 20% to the Greater London Authority, and pass the remaining 50% to central government. From central government, Hounslow will receive a small top-up payment, Revenue Support Grant and additional grants. This funding is shown in the table below.
2014/15 £m
Change £m
2015/16 £m
Locally collected business rates 150.856 5.267 156.123
Less: central government share 75.428 2.633 78.061
Less: Greater London Authority share 30.171 1.054 31.225
Hounslow’s share of business rates 45.257 1.580 46.837
Plus: Grants to support lower business rates 1.030 0.343 1.373
Plus: Cost of collection allowance 0.399 0.003 0.402
Total retained business rates income 46.686 1.926 48.612
Plus: Top-up payment from central government
0.517 0.010 0.527
Plus: Revenue support grant 53.980 -13.647 40.333
Total 101.183 -11.711 89.472
4.3 To protect authorities from unmanageable decreases in business rates income the
Government has put in place a safety net. For 2015/16 Hounslow‟s safety net level is £41.4m. If retained business rates income fell below this level the Government would provide funding through the safety net, but the first portion of any reduction would be suffered by Hounslow. It is considered unlikely that business rates income would fall as low as the safety net, however to protect against the risk £3m has been set aside as part of the contingency reserve.
4.4 The Business Rate (pence in the pound) is fixed by the Government as follows:
*2015/16 is still provisional
5. SPECIFIC GRANTS
5.1 The table below shows the larger grants received by the Council and indicates
whether they are held corporately or by an individual department. It also indicates those grants which have conditions on how they can be spent.
Grant Department 2014/15
£m 2015/16
£m Revenue support grant Corporate 54.0 40.3 Council Tax Freeze Corporate 1.0 1.0 Dedicated schools grant (ring-fenced) CAS 220.4 220.6 Better Care Fund CAS 0.0 15.3 Public Health Grant (ring-fenced) Corporate 14.1 14.1 New Homes Bonus Corporate 5.2 5.8
5.2 The Medium Term Financial Strategy indicated that in setting the 2015/16 budget the council would review which grants are treated as corporate income and how the expenditure funded by these grants would be managed. As a result of this review the way that the budget reflects the following income has been changed:
Public Health Grant
HRA recharges
5.3 Previously the income budget related to each of the above was across a number of different departmental service budgets. For the 2015/16 budget, this income is now included as part of the corporate items (this change has also been applied to the comparator data set out in Appendix A to ensure consistency between years).
6. DELIVERY OF THE CORPORATE PLAN 6.1 The Corporate Plan, approved by council on 16 September, summarises the
council‟s overarching priorities and performance targets for the period 2015-19. It is set in the context of financial constraint and the need to deliver £59m of savings between 2015/16 and 2018/19.
6.2 The plan covers the council‟s corporate priorities.
Keeping you safe Making Hounslow a safe borough by reducing crime and anti-social behaviour, and tackling drug and alcohol misuse that can lead to crime.
2014/15
p 2015/16*
p Change
Large business 48.2 49.3 2.28% Small business 47.1 48.0 1.91%
Brighter futures for our children Providing the best start in life for our children and young people with improvements in health and education. Keeping them safe from harm to help inspire more fulfilling lives.
Good quality homes and jobs Making sure more good quality homes, including affordable homes, are provided for residents and tackling homelessness, supporting economic growth and improving our town centres. And making the most of being close to Heathrow, central London and the Thames Valley to help people get and keep good quality jobs.
A cleaner, greener borough Making sure the borough is a place where people feel proud to live and work.
Active, healthy communities Promoting lifestyles that improve people‟s wellbeing and quality of life with less need for health and social care. Supporting people taking an active part in community life and reducing loneliness and social isolation.
Help and support when you need it Improving quality of life to reduce the need for care and hospital admissions while making sure there is high quality care and support for those who need it. Keeping vulnerable adults safe.
An ambitious Council, delivering quality services and value for money Having the best interests of residents at heart. Providing leadership for community and finding new, ambitious ways to improve our customer care for our residents and deliver even better value for money.
7. MEDIUM TERM FINANCIAL STRATEGY (MTFS)
7.1 The council approved the latest medium term financial strategy in November 2014
which outlined the strategy for managing the council‟s 2015/16 and future budgets. The underpinning principles of the strategy are to:
deliver residents‟ priorities,
constrain spending and council tax,
improve service quality and maximise resources,
provide sound governance and financial management,
provide a robust basis for the next Administration‟s lifecycle. 7.2 The strategy outlined a need to make £59m of savings over the four years from
2015/16 to 2018/19. Significant work by officers across the council has identified strategic decisions which will result in savings which span the four year period. These savings are being presented to council in tranches and help the council achieve its financial strategy and put it in a good position to meet the challenges ahead.
7.3 The council continues to review the wider financial climate and respond to changes as they occur. Throughout 2015 the Central government‟s budget announcement in March 2015 and later finance announcements will be considered when the council‟s medium term financial strategy is reviewed.
8. GROWTH 8.1 The MTFS contains a provision for £6.5m to offset inflation cost increases. This
budget report recommends a number of allocations from the 2015/16 corporate inflation budget as set out in Appendix C. These are summarised in the following table:
Ref Bid Title Dept Amount
CC01 Pay Award Cross-cutting 1,175,000
CC02 NNDR Cross-cutting 92,300
CAS01 LLW full-year effect Children's & Adults' 760,000
Total of allocations to be approved as part of budget report
2,027,300
8.2 The recommended allocations shown in the table above have been reflected in the
2015/16 budget set out in this report. After taking into account these allocations, £4.5m of 2015/16 inflation remains unallocated within the corporate items element of the budget. A number of potential inflation increases have been identified, but the exact financial implications have not yet been confirmed. In-year requests for inflation allocations are therefore expected. The following table sets out the latest estimate of potential in-year inflation bids. Once the impact of the inflation increase has been confirmed, allocations from the remaining corporate inflation pot will be recommended through the regular revenue monitoring reports presented to Cabinet.
Inflation pressure Dept Amount
Highways PFI Corporate Resources 236,700
Liberata Corporate Resources 139,600
Fusion – Leisure Corporate Resources 22,600
Carrillion Libraries Corporate Resources 150,000
Carrillion Parks Corporate Resources 124,700
ICT Corporate Resources 272,200
LLW inflation Children's & Adults' 430,000
ASC placements Children's & Adults' 260,000
Direct Payments Children's & Adults' 200,000
Internal foster allowances Children's & Adults' 137,000
Independent foster allowances
Children's & Adults' 43,000
Children‟s placements Children's & Adults' 96,000
Traffic signal maintenance REDE 56,200
Chiswick Gardens REDE 7,400
SERCO REDE 33,800
Civic contracts REDE 43,400
Bridge road contracts REDE 10,800
Concessionary fares REDE 118,200
WLWA levy increase REDE 174,000
SITA REDE 110,500
Total of allocations to be approved as part of budget report
2,666,100
9. SAVINGS 9.1 As outlined in the MTFS, the council has a savings target of £15m for 2015/16. A
total of £10.9m of savings for 2015/16 were approved by council in November, with a further £4.1m of 2015/16 savings set out in a report earlier on this agenda, ensuring that the £15m savings target has been achieved. These reports highlighted the investment required to develop and implement these savings, as summarised in the following table:
2014/15 £m
2015/16 £m
2016/17 £m
2017/18 £m
2018/19 £m
Cumulative £m
Redundancy 0.000 1.162 0.658 0.518 1.088 3.426
Capital 0.465 5.770 0.670 0.240 0.110 7.255
Other 0.228 1.260 0.225 0.025 0.650 2.388
Total 0.693 8.192 1.553 0.783 1.848 13.069 9.2 The budget contains an ongoing base budget element and has an amount set
aside in its earmarked reserves to cover redundancy costs as set out in the table below.
9.3 A significant proportion of the remaining investment required relates to capital
expenditure but in the nature of these schemes they will take time to be fully developed and costed so are currently outside of the capital budget presented. These investments will progress through to a revised capital programme later in the year and the resources that are intended to fund them are identified below.
9.4 The 2015/16 corporate items budget includes a one-off collection fund surplus
reflecting a higher level of council tax and NNDR income than was originally budgeted for in 2014/15. It is recommended that the additional income not already taken into account in the MTFS is set aside to fund the investment needed to deliver the savings. This, together with the budget available to cover the redundancy costs, leaves a balance of just over £6.2m of the total estimated investment to fund.
9.5 It is recommended that £6.2m from the council‟s contingency reserve is set aside
to provide sufficient funds to cover the remainder of the identified investment costs. The following table therefore summarises the resources being set aside to fund the investment required to deliver the savings.
2014/15 £m
2015/16 £m
2016/17 £m
2017/18 £m
2018/19 £m
Cumulative £m
Redundancy budget 0.500 0.400 0.400 0.400 0.226 1.926
Redundancy reserve 1.500 0.000 0.000 0.000 0.000 1.500 Total available for redundancies 2.000 0.400 0.400 0.400 0.226 3.426 Allocation from collection fund surplus 3.417 0.000 0.000 0.000 0.000 3.417 Allocation from other current reserves 6.226 0.000 0.000 0.000 0.000 6.226
Total resources identified 11.643 0.400 0.400 0.400 0.226 13.069 9.6 The above table highlights the scale of the investment required. It is therefore
important that a robust approval and monitoring process is in place to govern the investment expenditure. The budget set out in this report contains the above investment within the corporate items. While the level of investment needed has been identified, approval for each individual investment requirement is not incorporated into this budget.
9.7 As steps for implementation of savings are finalised, appropriate budget holders
will be required to prepare a business case demonstrating how the requested investment will deliver the approved savings and what the investment monies will be spent on. These business cases will be presented to Cabinet for approval.
10. PENSION FUND
10.1 Hounslow‟s employer‟s contribution to the Pension Fund will remain stable over 2014/15 to 2015/16 i.e. there will not be an increased cost to the General Fund from the Pension Fund.
10.2 Any costs of redundancy which create pension fund strain (i.e. early payment of
pension for employees over the age of 55 but not yet retirement age) must be paid by the employer making that decision, in order that the Pension Fund does not suffer a loss. A business case needs to be made out for relevant employees to ensure that any such redundancies are cost effective.
11. NEW HOMES BONUS
11.1 The New Homes Bonus (NHB) commenced in April 2011. The scheme rewards
authorities for the introduction of new homes, both new builds and those previously empty properties brought back into use. The income is held corporately, and the grant has increased in recent years as the system has been introduced. For 2015/16, £70m of new homes bonus grant is being top-sliced across London and pooled to the London Enterprise Panel (LEP).
11.2 The table below sets out the total amount of New Homes Bonus which will be available in 2015/16, and how it has been allocated. Spend occurring during 2014/15 has been included within the commitments section and will be finalised at year end.
12. DEDICATED SCHOOLS GRANT
12.1 The Dedicated Schools Grant (DSG) is a specific grant to support the schools‟ budgets. The Government are progressing towards a national funding formula for schools which was expected to be introduced from 2015/16 but implementation has at this time been delayed. Detailed information is yet to be issued by the Department for Education (DfE), however it is anticipated that it may be introduced from 2016/17. The changes, simplifying the previous methodology for funding schools and academies that were implemented from 1 April 2013 continue with some amendments through 2015/16, show the direction towards the national funding formula.
Resource £m
Balance as at 1 April 2014 9.4
2014/15 grant 5.2
2015/16 grant (provisional) 5.8
2015/16 grant top-slice to LEP -0.8
Total confirmed New Homes Bonus 19.6
Commitments (confirmed and provisional)
Heston leisure centre and affordable housing 4.6
Hounslow town centre – Outer London Fund match funding 0.6
Brentford office block 4.7
Waterman‟s marina 1.2
Holloway Street property purchases 2.8
Hartland‟s Traveller site 0.9
Total committed 14.8
Provisional commitments
Hartland‟s Traveller site 2.6
Total committed or earmarked 17.4
Uncommitted and available 2.2
12.2 The DfE announced details of the Schools Funding Settlement 2015/16 on 17 December 2014, which includes the Dedicated Schools Grant (DSG), Education Services Grant (ESG) and Pupil Premium rates and indicative Pupil Premium allocations for 2015/16. The DSG, which includes for the first time allocations for Free Schools and before recoupment for academy schools or those schools intending to convert to academy status during 2015/16, is detailed in the following table:
2015/16 DSG Allocations Total
£m Schools block 178.696 High needs block 33.550 Early years block 10.346 Newly qualified teacher (NQT) induction funding 0.051 Total 2015/16 DSG 222.643
12.3 In addition to DSG, Pupil Premium is allocated for all pupils who have been eligible
or are eligible for free school meals during the last six years and for Looked After Children and service pupils. Also a new Early Years Pupil Premium has been introduced nationwide for 2015/16 at the rate of £300 per disadvantaged infant. The unit rates applied for pupil premium allocations in 2015/16 will be increased to £1,320 per pupil for primary aged pupils but remains unchanged for secondary aged pupils. Provisional allocations for 2015/16 are shown in the following table, and final allocations will be based on the January 2015 pupil census data.
Pupil Premium 2014/15 2015/16 Total allocation £12.731m £12.877m Pupil Premium unit rate for pupils eligible for FSM
Primary £1,300 £1,320 Secondary £935 £935 LAC (Looked After Children) £1,900 £1,900 Children Adopted from Care £1,900 £1,900 Service pupils £300 £300
12.4 The allocation of the available DSG, including contingencies for the purpose of
supporting revenue funding for growth in pupil numbers and other unavoidable funding pressures within the high needs block (Special Educational Needs) was considered and agreed by Schools Forum at its meeting on 15 January 2015.
12.5 There is risk however regarding the affordability of the funding pressures in 2015/16 to be funded from DSG that were agreed by Schools Forum and the financial implications are being quantified. The final proposals will require agreement by DfE and the allocation of reduced resources within the DSG may have impact on schools ability to deliver desired outcomes and implications for other areas within the Council.
13. REVENUE BUDGET SUMMARY 13.1 Appendix A represents the council‟s revenue budget for 2015/16. The revenue
budget is summarised in the table below.
Service Base Budget 2015/16
£m
Chief Executive‟s/Corporate Resources 65.6
Children‟s and Adults‟ Services 91.7
Regeneration, Economic Development and Environment 34.5
Net Cost of Services 191.8
Treasury management and capital costs 6.0
Corporate items -18.9
Net Operating Expenditure 178.9
13.2 This 2015/16 budget incorporates the savings approved by Borough Council in
November 2014 and those set out in a paper earlier on the agenda (see paragraph 9.1), as well as inflation increases for 2015/16 as set out in paragraph 8.1 of this Budget Report. The budget also takes into consideration the changes in the local government settlement and any known changes in the specific grant allocations for 2015/16.
13.3 The main elements of the corporate items budget are as follows:
Specific grants and HRA recharge (£34.5m income) The budget for a number of corporate grants is held corporately together with the impact of recharges to the HRA
Unallocated inflation provision (£4.8m) £4.5 of the 2015/16 available inflation budget set out in the MTFS together with £0.3m of the 2014/15 inflation budget currently remains unallocated, and will be held as part of the corporate items until Cabinet approves any in-year inflation bids.
Corporately held expenditure budgets (£9.6m) The corporate budget includes £9.6m of unallocated expenditure budget (relating to investment required to deliver savings and New Homes Bonus), that may be transferred to directorates during 2015/16 as set out in other sections of this report
Corporate contingencies (£1.2m) The corporate items budget also includes an element to cover potential costs associated with bad debt and other pressures that are not be covered by directorate budgets.
Base budget calculation
13.4 The base budget results in net operating expenditure of £178.9m. To calculate the council tax requirement, the Formula Grant and the Collection Fund surplus must also be deducted from the base budget. The impact of these adjustments can be summarised as follows:
Budget 2015/16
£m
Net Operating Expenditure 178.9
Less:
Revenue support grant (inc. top-up) -40.9
Business rates -48.6
Collection Fund surplus -4.4
Council Tax Requirement 85.0
14. RISK MANAGEMENT
14.1 The financial implications of risks facing the council are taken into account when
preparing the budget. It is the chief financial officer's opinion that the budget is robust, that the level of reserves and balances is adequate, providing that the savings identified are delivered.
14.2 The council‟s risk management framework provides a process for the identification,
management and reporting on risks. The council‟s corporate risk register highlights a number of key risk areas, including the risk that the council is unable to deliver a balanced Medium Term Financial Strategy. A number of mitigating actions are in place to reduce this risk, including regular monitoring and reporting of expenditure against budget.
15. KEY RISKS
15.1 There are a number of key risk areas in the 2015/16 budget. These are detailed
below.
Welfare Reform and Temporary Accommodation 15.2 The Government continues with its Welfare Reform programmes. The major
changes and cuts in entitlement were introduced during 2013/14 and these continue to have an escalating effect on the local population as the impact of them deepens. Housing Benefit levels are likely to continue to fall in real terms, leading to further increases in Council expenditure as greater numbers of families seek help with a housing solution.
15.3 The Council has an obligation to ensure that families presenting as homeless are
provided with short-term accommodation whilst a long-term solution is found. Welfare Reform has impacted the council both directly – through reduction in benefits entitlement for housing purposes – and indirectly through pressure on local housing supply, as residents from high-value rent areas relocate to Hounslow.
15.4 Further strain on Council budgets is anticipated, not least when the Universal Credit regime begins. The Council continues to implement initiatives - including many newly introduced in 2014/15 - to mitigate the impact of the Welfare Reform agenda, with the aim of driving down the demand for, and cost of temporary accommodation.
Schools Places 15.5 The primary schools places strategy will have delivered 28 forms of entry in
primary schools between 2013/14 and 2016/17 through a combination of school expansions and free schools.
15.6 The surge in primary places demand will transfer to the secondary schools system from 2016 onwards requiring an additional 29.5 forms of entry in secondary schools between 2016 - 2020. This is equivalent to building three and half new secondary schools. This demand is expected to be delivered through a combination of free schools and expansion of existing secondary schools.
15.7 The financial impact of the school places programme is highlighted in the capital programme review.
Adult Social Care Demand 15.8 In 2015/16 the adult social care (ASC) budget is subject to substantial demand
pressures and efficiency savings particularly in respect of purchasing external residential and nursing care. The adult social care service is implementing integrated prevention and commissioning strategies aiming to reduce long term
demand for institutionalised care, and allowing clients to maintain their independence.
15.9 The ASC service will be under significant demographic challenges such as:
ageing population requiring assistance for social care
increase in residents with mental health needs
increase in younger adults with disabilities requiring assistance for social care
increase in support and assistance provided to carers.
15.10 As part of the demand management strategies in the social care and health economy the Hounslow CCG and Hounslow Local authority integrated better care fund (BCF), will implementing several new projects. This programme of delivery includes a £16.9m BCF pooled budget including £2.8m of funding paid on a performance by result basis. This pooled budget will have a joint risk reserve in place to reduce council liabilities and performance will need to be closely monitored to prevent overspends.
15.11 In April 2015 the first phase of the government‟s adult social care bill will be implemented nationally. The implementation of the first phase and planning for the final phase implementation in April 2016 will be a key objective for the service in 2015/16 and will also bring significant financial challenges. These reforms are the single biggest changes to social care policy for over 50 years.
15.12 These services are supported by the better care fund, £1.6m and additional central government funding of £921k, but due to the scale of change there is still uncertainty on what the financial implications of the bill will be.
Looked After Children (LAC) Demand 15.13 The children‟s specialist services division as at December, 2014, is projecting an
over spend of circa £1.6m, which relates to looked after children placements. With the growing numbers of LAC and SEN placements and the growing complexities of the cases presenting themselves, the service has struggled to achieve cost reductions in line with the specialist services divisional savings strategy.
15.14 The service has a 2 year mitigation strategy and a Medium term financial strategy to reduce the volume of LAC requiring long term care placements. These pressures will require careful management in 2015/16 to ensure the specialist services division can deliver services within budget.
Special Educational Need (SEN), Home to School Transport demand. 15.15 Demand for the home to school transport service has increased by more than 5%
year on year for the last 3 years. This increased demand coupled with the increase in complex cases and an increasing requirement to locate children in out of borough education provision has resulted in a significant increase in spend. During the 2013/14 financial year the service overspent by over £600k and the projected outturn for 2015/16 is expected to be over £1.2m.
15.16 The service is implementing and expanding several key projects in 2015/16 to assist with dealing with this financial burden these include:
Re tendering for a new transport framework.
Continuing and potentially expanding the independent travel training programme.
Re-evaluating the home to school transport criteria and legal requirements.
16. BALANCES AND RESERVES
16.1 It is a statutory requirement (Local Government Act 1992) that all councils maintain adequate reserves to cover external risks. It is the responsibility of the Assistant Director Strategic Finance (chief financial officer) to make judgements about the strategic and operational risks facing the council. The setting of the level of reserves is a key decision in formulating the council‟s annual budget and MTFS and needs to be seen in the context of an organisation with a turnover of about £1bn. The council‟s external auditors will also consider the approach to reserves and balances.
16.2 Reserves can be classified into two categories. Firstly, those reserves set aside to meet specific or known risks and commitments facing the council such as insurance losses covered by self-insurance. Secondly, a general balance to meet unknown and unforeseen risks which might impact on the council in the future. Without an adequate provision, the council could be faced with making immediate in year savings to meet any shortfall and thereby disrupting service delivery. It may also be unable to meet its statutory and civil responsibilities in an emergency.
16.3 The council currently seeks the advice of the Assistant Director Strategic Finance
when assessing the adequacy of its reserves provision. The Assistant Director Strategic Finance considers that an unallocated General Fund balance of at least 5% of net revenue expenditure and not less than £10m to be reasonable.
16.4 The December 2014/15 financial monitoring report projects an over spend of £3.7m on the General Fund. Mitigation plans are currently being implemented to contain costs across the overspending parts of the council, the objective of which is to significantly reduce, if not completely eliminate the departmental overspend by the end of the year.
16.5 As has been reported during the year in the monthly monitoring reports, drawings
from the Performance Improvement Fund have been used to cover costs of a number of key council initiatives. It is recommended that £2m of the special contingency reserve is used to top up the Performance Improvement Fund so that this resource continues to be available to fund key priorities
17. CONSULTATION 17.1 A series of budget presentations were given to Area Forum monitoring meetings in
November 2014, giving residents an opportunity to comment on the budget.
17.2 Consultations on individual savings proposals have been undertaken separately with relevant groups, where appropriate.
17.3 Consultation meetings took place with local businesses at a series of locations
throughout the borough – these were organised in conjunction with the local chambers of commerce.
Wednesday 22 October 2014 Hounslow Wednesday 29 October 2014 Chiswick Tuesday 11 November 2014 Brentford
17.4 At these events the Lead member for Finance gave a presentation to local
businesses on the Council‟s budget proposals for 2015/16. Following this, questions were taken from the floor with officers from the key service delivery areas available to assist with the answers to these.
18. FINANCIAL GOVERNANCE AND CONTROL 18.1 Responsibility for financial governance falls to the Assistant Director Strategic
Finance, as the Chief Financial Officer. Following the implementation of the new finance regulations and new ICT systems across the Council, and the changing role of managers there is a need to review and refresh the financial governance and control arrangements of the Council. A special project has been initiated specifically to review these procedures. Improved controls are being, and will continue to be, implemented where weaknesses or inefficiencies are identified.
18.2 Continued development of the Council‟s Agresso Budget planner system will
provide managers with the information and tools to help support effective decision making and enable budget holders to be more self-sufficient, and ultimately make it easier to identify areas where savings can be made.
18.3 Managers across the Council are responsible for projecting their spend and income levels for regular reporting to Cabinet. For areas which report overspends of £100k or more, mitigation plans are requested and should be signed off by the relevant lead member.
18.4 A projection of expected expenditure against the latest approved budget for 2014/15 is set out in paragraph 18.6. The table compares the approved budget for each department with the department‟s projection of its anticipated outturn for 2014/15.
18.5 Departments have provided projections of their expected net expenditure up to the
end of the financial year, including the impact of actions being taken by management to ensure that departments contain their expenditure within the approved budget. It is essential that such active steps continue to be taken to manage expenditure and remain within budget.
18.6 The table below shows the projected position at 31 December 2014. It shows the
overall variance between the projected year end expenditure for 2014/15 and the revised 2014/15 budget. The table shows the latest projected overspend of £3.7m.
Department
Original Budget
Revised Budget
Projected Out Turn Variance
£m £m £m £m Chief Executive 6.9 6.9 6.8 -0.1 Corporate Resources 42.9 42.7 42.9 0.2 Regeneration, Economic Development & Environment 29.9 30.0 33.5 3.5 Children's & Adults' 96.2 96.2 98.8 2.6
Net Service Spend 175.9 175.8 182.0 6.2
Corporate Items 6.8 6.9 4.4 -2.5
General Fund Total 182.7 182.7 186.4 3.7 18.7 The key budget pressures in 2014/15 are within temporary accommodation, as a
result of the impact of Welfare Reform on local residents and the availability of temporary accommodation units and Looked After Children service as a result of an increase in the external care cost placements for private residential, semi-independent, SEN and secure placements. These key budget pressures are expected to continue into 2015/16. Please refer to the key risks highlighted in paragraphs 15.1 – 15.16 for further details.
19. COLLECTION FUND
19.1 As a billing authority, the London Borough of Hounslow is required to maintain a separate Collection Fund for its council tax and non-domestic rates income. Non
domestic rates (less an allowance for appeals as well as the cost of collection) are shared between the General Fund, the GLA and central government. Council tax income is paid to the GLA, as required by the GLA precept and to the council‟s General Fund, in accordance with the resolution passed at this meeting.
19.2 On 13 January 2015, Cabinet approved a council tax base of 78,760.71. This took
account of expected council tax property bands in Hounslow for 2015/16, and included an allowance for losses on collection. Under the provisions of Section 11A of the Local Government Finance Act 1992, and section 75 of the Local Government Act 2003, and Regulations made under those Sections, it has been determined for the year ending 31 March 2015:-
that for all prescribed dwellings which are classed as second homes, the relevant council tax discount is zero.
that for all prescribed dwellings which are classed as undergoing major repair works or structural alteration, the relevant council tax discount is zero.
that for all prescribed dwellings which are classed as unoccupied and unfurnished, the relevant council tax discount is zero.
that the long term empty premium has been introduced where a property has been empty and unfurnished for a period of two years or more, the council tax premium is 50% (150% of the annual charge will be billed).
19.3 Any existing discount awards for empty properties and second homes, which have
now been reduced to zero will cease with effect from 1st April 2015. 19.4 Any collection fund surplus or deficit is shared between the council and the GLA.
On 23 January 2015, the council submitted an estimate of the surplus on the Collection Fund for 2014/15 to the GLA. The council‟s share is £3.82m and the GLA‟s share is £1.06m.
19.5 £1.6m of the 2015/16 savings are being delivered as a result of changes to the
level of the council taxbase. While the majority of this is as a result of a growth in the number of dwellings, a small proportion is being delivered by the following recommended changes:
Removal of the current 50% council tax discount for up to 12 months for properties undergoing structural alteration or major repair;
Removal of the one month exemption for unoccupied and unfurnished properties
19.6 In addition to these changes, the saving also recommended that a local reduction scheme be introduced to provide business rate relief to Hounslow business meeting the conditions to be accredited as London Living Wage employers. This relieve is to take the form of a one-off discount equivalent to the costs of accreditation to companies who become accredited with the Living Wage Foundation between 1 April 2015 and 31 March 2018
20. SETTING THE DEMAND ON THE COLLECTION FUND 20.1 The council is required, by the Local Government Finance Act 1992, to make a
number of calculations before it sets the council tax for its area. The calculations required are outlined in the following paragraphs.
20.2 Firstly, Section 31 of the Act requires the council to calculate its council tax
requirement for the year. In order to do this, it must first calculate its estimated gross expenditure for the year, plus any contributions to reserves. It must then calculate its estimated income for the year including Formula Grant and council tax surplus payable for the year into its General Fund plus any drawings from
reserves. This determines the council‟s estimated net expenditure for the year after allowing for changes to reserves.
20.3 Secondly, Section 31 of the Act requires the council to calculate the basic amount
of its council tax. At this stage, this excludes the tax that relates to the GLA precept.
20.4 Finally, Section 84 of the Local Government Finance Act 2003 empowers the
Cabinet to calculate the council‟s tax base. The Cabinet approved a council tax base of 78,760.71 on 13 January 2015.
20.5 The council‟s band D council tax is to be calculated using the formula:
R T
Where: R is the council‟s council tax requirement, calculated according to Section 31B of the Act. T is the council‟s own council tax base for the year. R = £85,043,452 as shown in paragraph 13.4 of this report T = 78,760.71 Therefore, the proposed 2015/16 Band D council tax set out in this report is £1,079.77.
21. GREATER LONDON AUTHORITY (GLA) PRECEPT 21.1 The Greater London Authority (GLA) issues an overall precept that includes core
GLA services, the Mayor‟s Office for Policing and Crime (MOPAC), the London Fire and Emergency Planning Authority (LFEPA), and Transport for London (TfL).
21.2 The timeline for the GLA budget setting process is:
the Mayor‟s Consultation Budget was issued 19 December 2014
the Mayor will present his draft consolidated budget to London Assembly on 28 January 2015
the Mayor will present his final draft consolidated budget to London Assembly on 23 February 2015
statutory deadline for Mayor to issue his council tax requirement 28 February 2015.
21.3 The Mayor of London proposed a reduction of just over 1.3% in the band D precept of £4 from £299 to £295 for 2015/16. This will be presented for approval at the London Assembly on 23 February 2015.
21.4 The GLA‟s element of council tax has to be added to Hounslow‟s element in calculating the overall council tax. Hounslow‟s council tax in this report is based on the final draft consolidated budget.
22. COUNCIL TAX SUPPORT
22.1 The Welfare Reform Act 2012 abolished the previous system of council tax benefit with effect from 31 March 2013. Its replacement, localised support for council tax was introduced from 1 April 2013.
22.2 Hounslow formally approved a scheme limiting increases to 8.5% of council tax liability for 2013/14 and this was retained for 2014/15.
22.3 Under the council tax support scheme, customers receiving support will not form
part of the council tax base as they will in effect receive a discount for their council tax support. The council tax support funding will be received through the revenue support grant.
22.4 For working age claimants, claimants will have to make some payment towards
their council tax; this is capped under council tax support (the scheme grants a maximum of 91.5% of previous benefit entitlement). In line with central government requirements, those of state pension credit age will be protected from any changes in the council tax benefit system.
23. LOCAL WELFARE PROVISION 23.1 The „Discretionary Local Crisis Payment‟ scheme introduced by Hounslow was
designed to cover all essential items required by a household following a disaster or crisis, or other identified circumstances, which are not available from other sources.
23.2 Arrangements have been made with suppliers of re-used furniture and white goods and we have worked with suppliers to increase supply for the provision of this scheme.
23.3 Work was being undertaken by the Community Partnerships Team to develop food
banks in the area and we can refer customers to their service for provision as they can direct their customers to us for other emergency goods. An award has been made to Foodbox this year to assist with this process.
23.4 Other main provision is through the use of Tesco vouchers for emergency food
provision and in certain limited circumstances bank payments for travel costs and utility bill payments.
23.5 In 2013/14 we had £599,028 as grant for programme funding. During the year we
spent £269,360.17 on goods and services along with a further £200,000 on the set up of a budgeted loans pilot with our local credit union.
23.6 We received 2,072 applications and made 1,447 awards to customers.
23.7 Expenditure for 2014/15 is expected to be around £300,000 with a slight increase
in applications from the previous year.
23.8 The recommendation is to carry forward any unspent grant, administration and expenditure, to allow the scheme to be continued for 2015/16. There will be no other additional funds for the authority during the coming year to continue this scheme.
23.9 A further review of the future of local welfare provision will be carried out in
2015/16.
24. FEES AND CHARGES
24.1 As part of the budget setting process, the Council needs to review fees and charges. The council sets fees and charges for a range of services provided to residents, businesses and visitors to the borough. These charges generate income which help fund the cost of providing the service. The majority of charges are set by the council but some are set by external bodies e.g. planning application fees and penalty charge notices for car parking offences.
24.2 The fees and charges proposed for 2015/16 are detailed within the fees and charges schedule in Appendix B. The appendix includes:
a summary of the corporate fees and charges policy;
charges that are set by statute or other policy - these are marked as statutory
the proposed 2015/16 charges and any concessionary arrangements;
the increase in the proposed charge in percentage terms;
SECTION 2 – HOUSING REVENUE ACCOUNT (HRA) BUDGET 2015/16 AND REVISED 3 YEAR HOUSING CAPITAL PROGRAMME
25. BACKGROUND
25.1 The Housing Revenue Account (HRA) is a ring-fenced account and is set in
accordance with the Local Government and Housing Act 1989. In April 2012 the Government replaced the Housing Revenue Account subsidy system with a devolved system of council housing finance called self-financing.
25.2 The proposed HRA budget was prepared in accordance with CIPFA guidance and
accounting best practice. Budget proposals will ensure balances are maintained at an appropriate level and adequate funding is available to deliver an effective housing service both directly and through Hounslow Homes. If balances are available an in year deficit can be budgeted for, overall there must not be a deficit on the account. The balance carried forward on the HRA must be set at a prudent level. At the end of 2014/15 the projected balance on the HRA is £29.567m
25.3 Whilst these balances are significant, members are reminded that overall the HRA
resources now have to be managed over the next 30 years, ensuring the prudent management of the self-financing debt over this period. The Council is committed to maintaining access to affordable homes as well as improving the quality of these properties and for that reason has identified building new council homes as a priority. The prudent management of this account is essential to ensure that there is sufficient funding for the on-going investment required in the council‟s housing stock over the next 30 years.
25.4 The budget and rents are set to ensure that the five key Housing Strategy
objectives for Hounslow are met:
1. Ensuring well managed and good quality social housing
2. Improving housing standards in private housing, particularly the private rented sector
3. Preventing Homelessness and reducing dependence on social housing
4. Increasing the supply of affordable housing, particularly family sized accommodation (3B+) and providing a range of opportunities for Hounslow Residents to become home owners
5. Working together to build healthy, safe and sustainable communities
25.5 Objectives 1, 4 and 5 are key objectives of the Housing Revenue Account. The
delivery of objectives 2 and 3 are funded through the General Fund and do not fall inside the ring fence of the HRA.
25.6 Decisions on the budget are driven by:
how much rent we receive from tenants
the income that can be raised from other housing activity, e.g. shops, garages, service charges, etc.
the council‟s objectives including those set out in the Hounslow Corporate Plan and the Housing Strategy of the council
26. HRA BUDGET STRATEGY AND KEY OBJECTIVES
26.1 The budget is influenced by central government pressure on resources available to the Local Authority. The council took on responsibility for servicing a significant level of debt at the commencement of the Self-Financing regime - this having previously been funded by the Department for Communities and Local Government. As a result, the council must now plan effectively to ensure that the HRA is able to service this debt and meet principal repayments in line with Business Plan projections. At the same time, resources for both investments in stock and service delivery to tenants must also be made available.
26.2 For the budget for 2015/16 the Housing Revenue Account estimates have been
revised based upon an analysis of the projected income and expenditure in the financial year 2014/15, and the recalculation of a number of the council‟s charges to the HRA.
26.3 The opening balance on the HRA at 1 April 2014, was £27.699m, and an in-year
surplus of £1.868m is budgeted.
27. HRA BUDGET 2015/16
27.1 As in previous years the provisional HRA estimates assume that rents continue to be set in accordance with the council‟s adopted rent restructuring policy. This will result in an average rent of £105.18. In addition, service charges to tenants will increase in accordance with this policy. Overall the rent and service charge income estimate has increased by £2.16m.
27.2 The key variances between the proposed base budget for 2015/16 and the council approved base budget for 2014/15 are shown in the table below.
27.3 Base Budget 2014/15 movements to Base Budget 2015/16 are shown in the table below:
Base Movement Base
2014/15 2015/16
£000's £000's £000's
Dwelling rents -68,313 -2,006 -70,319
Non-dwelling rents -1,872 -52 -1,924
Charges for services and facilities -8,965 -156 -9,121
Lessees‟ charges for services and facilities -1,969 0 -1,969
Contributions towards expenditure -829 -154 -982
Total Income -81,947 -2,369 -84,316
Repairs and Maintenance 15,003 0 15,003
Supervision and Management 12,476 0 12,476
Special Services 12,008 0 12,008
Rents, Rates, Taxes and Other Charges 1,254 0 1,254
Provision for bad and doubtful debts 1,006 -506 500
Depreciation and Impairments 16,043 0 16,043
Debt Management costs 13 0 13
Corporate and Democratic Core 799 0 799
Total Expenditure 58,602 -506 58,096
HRA Net Income from Services -23,345 -26,220
Interest payable and similar charges 11,165 -2,530 8,635
Interest and Investment income -239 -35 -274
(Surplus)/deficit for the year -12,419 -17,859
Revenue Contributions to Capital 9,905 23,095 33,000
Appropriations 646 189 835
Total -1,868 17,844 15,976
Balance brought forward -27,699
-29,567
Balance carried forward -29,567 -13,591 27.4 The table highlights the increase in rental income to the HRA, based upon an
average increase of 3.7%. This increase in rent is used to fund the expenditure that is required on the council housing stock.
27.5 The increase in the charges for services and facilities are a result of the inflationary
increase in service charges to tenants.
27.6 The increases in lessees‟ contribution towards expenditure are due to a slight increase in the contributions towards major works.
27.7 The majority of HRA expenditure was previously through management fees to
Hounslow Homes. Following the re-integration of Hounslow Homes to the Council, these budgets will now be Council budgets.
27.8 The Council‟s housing department is undergoing restructuring, and as a result it is
anticipated that budgets for Repairs and Maintenance, Supervision and Management, and Special Services will be adjusted during the financial year 2015/16.
27.9 The impact of Welfare Benefit reform has not yet had a dramatic impact on HRA
as originally projected. This is due to a combination of delays to the introduction of the changes to benefits, and the pro-active work undertaken by the council and Hounslow Homes to engage with those tenants who would be affected.
27.10 A number of expensive (high interest rate) HRA loans matured in 2014/15. New
borrowing is being undertaken at significantly lower interest rates, and as such, the HRA benefits from a significantly reduced level of interest charges.
27.11 A significant increase in the Revenue Contributions to Capital (RCCO), will be
required to meet the planned capital expenditure programme for the year. This is primarily as a result of the costs of delivering new build projects.
28. HRA CAPITAL INVESTMENT PROGRAMME 28.1 The HRA Capital Programme is derived from the latest stock condition survey,
which outlines the short, medium and long term investment requirement for the HRA stock.
28.2 This is an annual process and the resultant Capital Programme is fed into an
updated 30-year Business Plan designed to meet the following objectives;
keep the existing stock in good condition by replacing or refurbishing elements as they reach the end of their lives (as evidenced in the Stock Condition Survey)
contribute towards the council‟s pledges to residents (e.g. secure homes, providing new homes)
co-ordinate estate roadway improvements with the council‟s highways project
meet the aspirations of residents in terms of the type of place they would like to live in (e.g. designing and delivering estate improvements, securing blocks, play areas, roadway, paving and parking improvements)
meet the current and longer-term housing needs of the local community (e.g. new family housing, homes designed for older residents, life-time homes)
assist elderly and disabled tenants to remain living independently in their own homes (through programmes of aids and adaptations)
reduce fuel poverty and contribute to Government carbon reduction targets (e.g. by undertaking energy efficiency works, building sustainable homes).
28.3 Members are asked to approve the year 1 allocation in support of the programme (2015/16) including an addition to this to reflect unspent resources from 2014/15. Members are also asked to note the remainder of the five year HRA capital Investment Programme, as also set out within the HRA Business Plan.
Year
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 1 2 3 4 5
EXPENDITURE: £’000 £’000 £'000 £'000 £'000 £'000
Planned Variable Expenditure 0 0 0 0 0 0
Planned Fixed Expenditure 17,146 27,089 28,339 29,048 29,773 30,754
Other Capital Expenditure 0 0 0 0 0 0
New Build Expenditure 25,477 37,852 19,379 7,700 5,000 0
Procurement Fees 1,605 1,647 1,689 1,731 1,775 1,819
Previous Year's B/F Shortfall 0 0 0 0 0 0
Total Capital Expenditure 44,228 66,588 49,407 38,479 36,548 32,573
28.4 There are likely to be some unspent resources brought forward from 2014/15 and these, together with the commitments which form a first call against them, will need to be added to the programme closer to the end of the financial year.
28.5 The summary also includes the expenditure in respect of the Investment team fees, and other associated delivery costs.
SECTION 3 – LONDON BOROUGH OF HOUNSLOW CAPITAL PROGRAMME 29. OVERVIEW OF CAPITAL PROGRAMME
29.1 The following table provides an overview of the capital programme, analysed by delivery area:
All amounts in £m Profiled spend
2014-15
Profiled spend
2015-16
Profiled spend
2016-17
Profiled spend
2017-18 Total
Public realm improvements 4.4 2.1 0 0 6.5 Town centre redevelopment 5.6 0.1 0 0 5.7 Schools maintenance 14.6 2.8 0.2 0 17.6 Schools expansion 44.3 19.5 11.6 0.2 75.6 Children's Centres 4.2 0.4 0.1 0 4.7 HRA core capital programme 16.1 11.1 0 0 27.2 HRA new build programme 24.6 22.2 2.3 2.8 51.9 Hartland‟s 2.1 0.8 0 0 2.8 Housing grants 2.4 0.3 0 0 2.7 84 London Road 1.6 0 0 0 1.6 Trio 0.2 1.0 0 0 1.2 Adult Social Services 0.1 0 0 0 0.1 Children's Social Services 0.1 0 0 0 0.1 Waterman‟s Park Marina 0.8 0.5 0 0 1.3 Heston leisure centre 8.6 6.6 2.0 0 17.2 Gunnersbury park 0.4 0 0 0 0.4 Playgrounds 0.7 0 0 0 0.7 Leisure projects 1.7 0.1 0 0 1.8 Treaty centre 0.4 0 0 0 0.4 Fleet Replacement Programme 0.6 0 0 0 0.6 Energy Reduction Initiatives 0.1 0 0 0 0.1 Civic centre 0.2 0.1 0.1 0.3 0.7 Total 133.7 67.6 16.3 3.3 220.9
29.2 The funding sources for the capital programme above is set out in the table below:
All amounts in £m Amount Capital Receipts 9.5 Grant 104.1 Borrowing 19.0 Reserves 84.8 s106 3.5 Total 220.9
29.3 As detailed in this report there is significant pressure on the capital budget with a
number of projects identified for delivery and limited resources available to fund them. The future plans for capital investment and measures being put in place to finance the investment are addressed in the Capital Review report to Cabinet on 10th February. The key actions set out in the report were:
Corporate capital resource will be prioritised to meet statutory or regulatory requirements or that will reduce revenue costs or create sustainable revenue income streams.
Public realm projects will be funded only from resources provided for public realm investment, capital receipts are not to be used.
Resources totalling £4.9m will be released from: 84 London Road (Acton Lodge) £1.3m Trio £0.5m Road safety £0.9m Hounslow High Street £0.8m 84 London Road £0.5m Civic Centre £0.9m
New homes bonus allocated for the purchase of an office block in Brentford to be unallocated if the purchase does not proceed.
Authorise borrowing of £88m to close the identified funding gap and identify resources to of £5.3m to service this debt from 2020.
Create a revenue budget to be used to finance exploratory feasibility work prior to a capital project being agreed.
Direct lead members and departments to review their current and future
capital projects the timetable for delivery
Review reserves and allocate any available resource to the capital
programme by June 2015 and revise the Medium Term Financial Strategy in
line changes
SECTION 4 - TREASURY MANAGMENT STRATEGY, INVESTMENT STRATEGY,
PRUDENTIAL INDICATORS AND MINIMUM REVENUE PROVISION POLICY
30. PURPOSE
30.1 In 2009 the Chartered Institute of Public Finance and Accountancy (CIPFA) amended its Treasury Management Code of Practice. The council is required to comply with all aspects of the CIPFA Code. Hounslow adopted the revised Code at the council meeting on 2 March 2010. There were some further minor amendments to the Code in November 2011, primarily to reflect the changes arising from Housing Revenue Account (HRA) reform, which have been accepted by Borough Council.
30.2 The Local Government Act 2003 and subsequent supporting regulations require the council to set out a suite of reports covering its treasury management activities. This is a composite report and includes the:
Annual Treasury Management Strategy for borrowing
Annual Investment Strategy (as required by investment guidance issued subsequent to the 2003 Act) for managing our investments and for giving priority to the security and liquidity of those investments
Minimum Revenue Provision Statement setting out what provision is made in the General Fund for the repayment of debt and how this provision has been calculated
Prudential and Treasury Indicators to ensure that the council‟s investment plans are affordable, prudent and sustainable.
30.3 The five key objectives of the strategies are to ensure:
An efficiently structured debt portfolio to minimise costs
The security and liquidity of our investments
Investment returns are maximised whilst protecting the security of investments
Effective cash flow management
The management of risks.
31. TREASURY MANAGEMENT ANNUAL STRATEGY 2015/16
31.1 The strategy for 2015/16 is based upon the Assistant Director Strategic Finance‟s
views on interest rates, as informed by leading market forecasts provided by the council‟s external treasury advisor. The strategy covers:
The current treasury position – base portfolio position
Prospects for interest rates
The borrowing requirement and strategy for the General Fund
The borrowing requirement and strategy for the Housing Revenue Account
Policy on borrowing in advance of need
Debt rescheduling and repayment
The Annual Investment Strategy
The Minimum Revenue Provision (MRP) Strategy
Money laundering
Policy on use of external service providers
Training
Risk
Highways Maintenance PFI (Private Finance Initiative) – Treasury Risk
Treasury Limits and Prudential Indicators
Financial implications.
31.2 It is a statutory requirement under Section 33 of the Local Government Finance Act
1992 for the council to produce a balanced budget. In particular a local authority must calculate its budget requirement for each financial year to include the revenue costs that flow from capital financing decisions. This means that any increases in capital expenditure must be limited to a level where increases in charges to revenue are kept to a level that is affordable within the projected income of the council for the foreseeable future. Such charges to revenue arise from increases in debt charges caused by increased borrowing to finance additional capital expenditure, and from any increases in running costs from new capital projects.
32. BASE PORTFOLIO POSITION
32.1 The Council‟s external borrowing & investment position at 31 March 2014 was as
follows:
HRA – Housing Revenue Account, GF – General Fund PWLB - Public Works Loan Board
32.2 As previously reported, the Council‟s borrowings were split into two portfolios as at 1
April 2012, following the move to self-financing of the Housing Revenue Account (HRA). This split was made on the basis of the Capital Financing Requirement (CFR) at 1 April 2012. [Hence the HRA has £222m of external loans, whereas the General Fund only has £20m.]
32.3 The Capital Financing Requirement (CFR) measures the authority‟s underlying need to borrow for capital (not revenue) purposes. The HRA CFR is covered by loans, external as referred to above, and some internal loans from the General Fund. The General Fund CFR at the start of 2014/15 was actually £121m. As detailed above only £20m of this was covered by external debt. The remainder has been financed from internal debt i.e. from using temporary investments. It has been more cost effective to use internal cashflow monies, which would currently earn a very low rate of interest if invested, than to borrow externally on the market, and pay higher interest rates.
32.4 All of the authority‟s external borrowing is fixed rate, and hence will not be directly
affected by rising interest rates. The authority would benefit from rising interest rates on its temporary investments. The monies available for investing are primarily cash flow derived, and are only available temporarily pending expenditure.
Total principal
£m
HRA
£m
GF
£m
Average rate %
Fixed rate funding PWLB 169.9 155.7 14.2 6.07
Market 72.0 66.0 6.0 4.19
Total borrowing 241.9 221.7 20.2 5.51
Total investments -227.1 -37.0 -190.1 1.11
Net borrowing/investments 14.8 184.7 -169.9
33. PROSPECTS FOR INTEREST RATES 33.1 The Council has appointed Capita Asset Services as its treasury advisor. Part of their
role is to assist the Council to formulate a view on interest rates. 34. ECONOMIC BACKGROUND
34.1 The Bank of England has left the bank rate unchanged at the historic low of 0.50%
since March 2009. The current economic outlook has several key treasury management implications:
In the Eurozone there are still major concerns as to how sovereign debt difficulties will be managed over the next few years, as levels of government debt to GDP ratios, in some countries, continue to rise to levels that could result in a loss of investor confidence in the financial viability of such countries. Counterparty risks therefore remain elevated. We will continue to use only high quality counterparties, as detailed in our Investment Strategy, at Appendix D.
Investment returns are likely to remain relatively low during 2015/16 and beyond;
Borrowing interest rates have been volatile during 2014 but are on a rising trend. The policy of avoiding new borrowing by running down spare cash balances has served well over the last few years. However, this needs to be carefully reviewed to avoid incurring even higher borrowing costs, which could occur, where new borrowing is necessary to finance new capital expenditure and/or to refinance maturing debt;
There will remain a “cost of carry” to any new borrowing which causes a temporary increase in short term investments as this would currently incur a revenue loss between borrowing costs and investment returns.
35. INTEREST RATE FORECAST
35.1 The following table gives the Capita view on interest rates:
(%) Mar 15
Jun 15
Sep 15
Dec 15
Mar 16
Sep 16
Dec 16
Mar 17
Jun 17
Bank rate 0.50 0.75 0.75 1.00 1.00 1.25 1.50 1.50 1.75
5yr PWLB rate
2.70 2.70 2.80 2.90 3.00 3.20 3.30 3.40 3.50
50yr PWLB rate
4.00 4.10 4.30 4.40 4.50 4.70 4.70 4.80 4.80
36. BANK RATE
36.1 The bank rate has stayed at 0.50% since March 2009. The bank rate is expected to start increasing in June 2015, when it is projected to rise to 0.75%. Thereafter it is projected to rise gradually to 1.50% in 2016, and 1.75% in June 2017.
37. LONG TERM PUBLIC WORKS LOAD BOARD (PWLB) RATE
37.1 The 5-year PWLB rate is expected to rise from 2.70% to reach 3.30% in 2016, and 3.50% in June 2017. The 50-year PWLB rate is forecast to rise from 4.00% to reach 4.70% in 2016, and 4.80% in June 2017.
37.2 From the above it can be seen that the yield curve is positive, with longer-term rates being higher than short-term rates.
37.3 The PWLB introduced a new „certainty‟ rate from 1 November 2012 for authorities that submitted a return of their borrowing requirements for the next three years. The
„certainty‟ rate is discounted at 0.20% below the published standard borrowing rates. The London Borough of Hounslow submitted an accepted return, and would therefore be able to borrow at 0.20% below the rates in the table at paragraph 35.1, if external borrowing need was to be identified. The „project rate‟ identified by the Chancellor in the 2012 Autumn Statement is 0.40% below standard rates, but only applies to „local enterprise partnerships‟.
38. CAPITAL FINANCING STRATEGY
38.1 The current prudential system of capital controls allows local authorities to determine
their own levels of capital expenditure, as long as that level of expenditure is affordable, prudent and sustainable. The current capital programme has been set at a level that can be financed within identified resources. The capital programme's main source of financing is capital grants, primarily from the Government. Capital receipts from the disposal of properties are also used. Other sources of finance are direct revenue financing and borrowing. The borrowing arrangements to finance the capital programme are included in this Treasury Management Strategy.
38.2 There are a number of challenges facing the Council, whereby the Council may have to take out new borrowing. Key drivers of this are the need for additional school places, the development of a new civic centre, and timing differences on invest to earn projects being developed. If these projects result in the authority having to take out new borrowing, the revenue budget will need to be confirmed to finance such borrowing. The Treasury Management Strategy will be updated when these decisions are more certain.
39. GENERAL FUND BORROWING REQUIREMENT
39.1 The council's General Fund borrowing requirement, as identified at 31 October 2014,
is as follows:
2014/15 £m
2015/16 £m
2016/17 £m
2017/18 £m
New supported borrowing 6.2 0.2 0 0
New prudential borrowing 0.5 6.0 2.0 0
Replacement borrowing 3.0 1.0 0.1 0.1
Total borrowing requirement 9.7 7.2 2.1 0.1
39.2 Supported borrowing relates to allocations by the Government where the financing
costs are provided for within the revenue formula grant system. There is no supported borrowing after 2010/11 and what would have been included in the grant settlement is allocated via capital grant. Supported borrowing in 2014/15 and 2015/16 relates to schemes on which approval had already been received. These are all education schemes. The prudential borrowing refers to borrowing whose costs fall on the Council's revenue budget and do not attract government support. For 2014/15 the General Fund prudential borrowing relates to improvement works at the Treaty Centre and the 2015/16 and 2016/17 borrowing relates to the Heston Leisure Campus. The revenue implications of borrowing have been included in the Council's general fund budget. Replacement borrowing relates to borrowing for maturing debt.
40. GENERAL FUND BORROWING STRATEGY
40.1 As detailed in paragraph 39.1 the General Fund borrowing requirement for 2015/16 is
estimated to be £7.2m and £2.1m for 2016/17. This is a combination of borrowing to finance capital expenditure and replacement borrowing for maturing debts. The requirement takes account of the two main objectives of the Prudential Code, which are that:
a) capital expenditure plans are affordable, and
b) all external borrowing and other long-term liabilities are within prudent and sustainable limits.
40.2 The borrowing requirement for 2015/16, of £7.2m, is expected to be met by using
internal resources and reducing investments.
40.3 The table in paragraph 39.1 only includes borrowing for schemes that have already been approved. As discussed above in paragraph 38.1 there is potential new borrowing from 2015/16 to 2017/18 to finance the schools‟ capital funding gap, the move from the Civic Centre, and some invest to save schemes. The Treasury Management Strategy will be revised when decisions are clearer. Option appraisals will be undertaken to determine the most cost effective way of financing this expenditure. Financing methods could include external borrowing or using internal investments in lieu of external loans.
41. HOUSING REVENUE ACCOUNT BORROWING REQUIREMENT
41.1 The council's Housing Revenue Account borrowing requirement, as identified at 31
October 2014, is as follows:
2014/15 £m
2015/16 £m
2016/17 £m
2017/18 £m
New borrowing 4.0 1.6 5.0 0.0
Replacement borrowing 32.3 11.3 0.4 0.4
Total borrowing requirement 36.3 12.9 5.4 0.4
41.2 New borrowing to finance capital expenditure is determined by the HRA Business
Plan. The above table only includes borrowing for schemes that have already been approved, such as Heston and Manor Lane. There could be additional borrowing if a decision is taken to use the borrowing headroom allowed within the plan. As yet specific projects and timelines have not been identified. There is also a large borrowing requirement to replace maturing debt over the next couple of years.
42. HOUSING REVENUE ACCOUNT BORROWING STRATEGY
42.1 The borrowing requirement for 2015/16, of £12.9m, is expected to be met initially by
the General Fund lending resources to the HRA, at PWLB rates. 43. POLICY ON BORROWING IN ADVANCE OF NEED
43.1 The current borrowing requirement for 2015/16 for the General Fund and the HRA is
expected to be met by using internal resources and reducing external investments. Consideration will be given to refinancing maturing debt in 2015/16/17 ahead of need if interest rates are advantageous to secure long term value for money.
43.2 It is not permissible to borrow in advance of need simply to reinvest in the money markets.
44. DEBT REPAYMENT AND RESCHEDULING
44.1 The potential for making savings by using investment balances for repaying debt
prematurely will be kept under review. However, under the current interest rate structure the premiums that would be incurred by prematurely repaying debt make this action uneconomic. This is because in order to prematurely repay debt the borrower has to pay the lender a premium which represents the cash flows of the existing loan discounted at the current interest rate. As interest rates are currently low compared with the existing debt, this would result in large premiums which would be unaffordable.
45. ANNUAL INVESTMENT STRATEGY
45.1 Appendix D details the approach for identifying counterparties deemed sufficiently secure to place our investments. The monies the Council has available for investing are primarily cash flow derived, and are only available temporarily pending expenditure. Hence, they will primarily be invested in periods of less than one year and for no longer than two years. Our investment priorities are security and liquidity. This Council will only invest in institutions with the highest security. The policy on counterparties is regularly reviewed.
45.2 Funds will primarily be invested according to the Secretary of State's definition of specified investments, these being sterling deposits made for periods of less than one year, offering high security and high liquidity. Specified investments include deposits with the UK government, other local authorities, money market funds, and institutions with high credit ratings. A lending list is compiled to include counter parties satisfying the criteria set by the authority. The Annual Investment Strategy is attached at Appendix D to this report.
46. THE MINIMUM REVENUE PROVISION (MRP) STRATEGY 46.1 It is a statutory duty to set aside from revenue, for the general fund only, a Minimum
Revenue Provision (MRP) to repay the principal of debt. The Council is required to approve a specific statement on this, which is Appendix E of this report. The purpose of the Statement is to ensure that provision is prudent, allowing debt to be repaid over a period commensurate with that over which the capital expenditure will provide benefits. Decisions on how and whether to repay housing debt will be dependent on the HRA Business Plan. Currently, maturing housing debt is being refinanced.
47. POLICY ON THE USE OF EXTERNAL SERVICE PROVIDERS
47.1 The Council uses Capita Asset Services (formerly Sector) as its external treasury
management adviser. The Council recognises that responsibility for treasury management decisions remains with the Authority at all times and will ensure that undue reliance is not placed upon its external service provider.
47.2 The Council also recognises that there is value in employing external providers of
treasury management services in order to have access to specialist skills and resources. Capita Asset Services were reappointed for a period of three years from 1 July 2013 with the option to extend for a further year.
47.3 Council officers meet with Capita quarterly and provide them with a monthly list of
outstanding investments. Capita also has details of the council‟s debt portfolio, so they are able to monitor against current interest rates and give timely advice.
48. TRAINING 48.1 In line with best practice, the Council operates a programme of treasury management
training. There is a strong commitment that all staff dealing with treasury management receive comprehensive training on an ongoing basis. It is also a requirement of the CIPFA Code that members receive appropriate training. Since May 2010 three training sessions to members have been delivered, one to Audit Committee members and two to which all members were invited. Chief Officers have also been trained. A training log is maintained.
49. RISK
49.1 The key risks associated with treasury management issues are:
Interest rate risk: the council's long term borrowing is all fixed rate debt and so will not be directly affected by increases in interest rates. Overall the council will
benefit from rises in interest rates during 2015/16 as its short-term investments are affected by increases in interest rates;
Counter party risks: the Investment Strategy details how we identify counter-parties for investing with. We use only the highest credit rated institutions and set limits for exposure to each organisation;
Liquidity risk: this is the risk that cash will not be available when required. This risk is reduced by the preparation of cash forecasts, and investing bearing in mind future cash requirements. The majority of our investments are less than one year and all less than two years. There is currently no reason to change this policy;
Maturity risk: our long term borrowing is phased over the next 60 years, so in any one year we will not be faced with a significant amount of debt needing to be refinanced.
50. HIGHWAYS MAINTENANCE PFI (PRIVATE FINANCE INITIATIVE) – TREASURY
RISK
50.1 The council has started a 25 year contract with Vinci Ringway to deliver highways related services from January 2013. The financial model is dependent on interest being generated on cash flows over the life of the contract. It is anticipated that the required interest will be generated using our current counter parties i.e. additional risk will not need to be taken to generate the interest.
51. TREASURY LIMITS AND PRUDENTIAL INDICATORS
51.1 It is a statutory duty under Section 3 of the Local Government Act 2003 for the
Council to 'determine and keep under review' how much it can afford to borrow. This is called the “Affordable Borrowing Limit” and is the authorised limit for external debt referred to in the CIPFA Prudential Code. It is the maximum amount of loan debt that may be outstanding at any point in time, and includes both borrowing for capital purposes and an allowance for any temporary borrowing. The Prudential Code requires the Council to ensure that total capital investment remains within sustainable limits and, in particular, that the impact upon its future Council tax and rent levels is „acceptable‟. The full indicators are attached at Appendix F.
52. FINANCIAL IMPLICATIONS 52.1 External borrowing using PWLB and market loans are projected as below. At the
moment this table assumes HRA maturing debt will be financed by a loan from the General Fund
52.2 External borrowing (i.e. PWLB and market loans)
March 2014 Actual
£m
March 2015 Estimate
£m
March 2016 Estimate
£m
General Fund 20.2 17.2 16.2 HRA 221.7 189.4 178.1
Total 241.9 206.6 194.3
52.3 As stated above the General Fund has lent money to the Housing Revenue Account
to refinance its maturing debt. The details are below. The HRA is paying the General Fund at 2 year PWLB rates.
52.4 Internal borrowing (i.e. General Fund to HRA)
March 2014 Actual
£m
March 2015 Estimate
£m
March 2016 Estimate
£m
Total 13.6 45.9 57.2
52.5 The revenue implications of the treasury management policy for 2014/15 and 2015/16 are as below. Provision has been made within the appropriate budgets for these costs.
Original 2014/15
£000
Revised 2014/15
£000
Estimate 2015/16
£000 General Fund (GF) MRP – principal repayment Interest payable on borrowing Interest receivable on investments: External Internal from HRA Premium re debt rescheduling
5,359
909
-1,125 -470
97
5,287
909
-1,764 -470
79
5,401
787
-800 -853
75 Total GF 4,770 4,041 4,610 Housing Revenue Account (HRA) MRP – principal repayment Interest payable on borrowing: External Internal to GF Interest receivable on investments Premium re debt rescheduling
0
10,695 470
-274 7
0
10,695 470
-389 7
0
8,635 853
-300 11
Total HRA 10,898 10,783 9,199
52.6 The interest payable is reducing for both the General Fund and the Housing Revenue
Account. This is due to £35m high interest debt of over 9% maturing in 2014/15. The HRA's element, at £32m, is being refinanced by the General Fund at a far lower rate of interest, at 1.6%. The saving is particularly significant for the Housing Revenue Account, where there is an annual revenue saving of £1.7m. The saving for the General Fund is £0.1m, since the latter‟s share of the £35m was only £3m.
52.7 Budgeted external interest receivable for the General Fund has increased from £1.1m
to £1.8m within 2014/15 due to a combination of placing deposits at higher rates of interest than budgeted for (primarily with RBS) and due to higher temporary cash flows than originally forecast. This has been reported to Members as part of the regular quarterly monitoring reports and is beneficial to the budget.
52.8 However, in 2015/16 external investment income is forecast to drop back to £800k.
This is due to lower rates of interest being anticipated for our temporary investments and we are also forecasting a lower level of cash balances, as balances are used. It is anticipated that the authority will incur expenditure of £45m on school expansions during 2014/15 and a further £20m in 2015/16 reducing the level of cash held in temporary investments. In addition temporary investments are being used to refinance HRA maturing debt.