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MEDIUM TERM FINANCIAL STRATEGY APPENDIX

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MEDIUM TERM FINANCIAL STRATEGY APPENDIX Powered By Docstoc
					      PURBECK DISTRICT COUNCIL

      2006-2011 MEDIUM TERM FINANCIAL STRATEGY

1.    INTRODUCTION

1.1   Background

      The purpose of the medium term financial strategy is to provide the overall context for the Council’s
      investment in services from 2006 to 2011. That investment may be from revenue or capital funds. The
      medium term financial strategy also deals with the financing of that investment.

      The medium term financial strategy is based on the Council’s approved Corporate Strategy for 2006-2011,
      updated in December 2006, and the Council’s priorities detailed within it. The medium term financial strategy
      also informs the capital strategy and the treasury management strategy.

      The budget pressures that are building throughout local government services make it difficult for the Council to
      achieve its strategic objectives in future years. Traditionally, the Council has adopted an approach to service
      delivery whereby it has been prepared to finance services but has not been concerned with which organisation
      provides them. The Purbeck Community Partnership provides an opportunity for the Council to challenge, in a
      more radical way, why the Council is involved in the delivery of a service and why council taxpayers across
      the district are called upon to finance services. With this in mind, the Council translated its strategic objectives
      in a way that involves:

                  The Council exercising community leadership through its community planning approaches, including the
                   Purbeck Community Partnership, underpinned by effective consultation

                  Resources raised from taxpayers being used primarily to finance services that benefit the community as
                   a whole

                  Taxpayers resources being used to finance services directed at the most vulnerable members of the
                   local communities

                  Services used by individuals being financed, as far as possible, by fees and charges that the Council is
                   able to levy

      This approach implies that the Council’s services should have a defined financial objective, which would be
      approved by Members, and tracked over time, with a number having an objective to break-even, in the
      medium term. As the Council moves towards this position there will be a need for interim financial
      arrangements, to ensure that the council tax is not subject to excessive increases while the strategy is
      introduced.

1.2   Vision

      Recognising Purbeck is a very special place, the Council’s long term vision for Purbeck is one of “thriving
      communities in balance with the natural environment”.

1.3   Strategic Priorities

      Overarching strategic priority:

                     Protecting and enhancing the natural environment.

      Service based priorities:

                     Meeting the housing needs of local people.

                     Helping people access services locally and meet local transport needs.

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                     Improving the local economy.

                     Enhancing the quality of life in Purbeck.

      How we as an organisation will act.

                     Being recognised as an effective, motivated, customer focused organisation.

1.4   Control Environment

      The Council’s Section 151 Officer has set out financial delegations, systems and procedures within Financial
      Regulations, approved by Council and incorporated into the Council’s Constitution. Financial Regulations
      create a control framework within which the Council’s officers work.

      The accounting policies applied in each financial year are set out in the Explanatory Forward to the annual
      Statement of Accounts.

      The above form part of the Council’s control environment which is subject to independent review by both
      Internal Audit and the Audit Commission, the Council’s external auditors. The control environment is also
      subject to review as part of internal monitoring which leads to the production of the Statement on Internal
      Control, which assesses the effectiveness of the control environment and identifies areas for improvement
      and is published with the financial statements.

      The Medium Term Financial Strategy draws on the strength of the Council’s corporate governance and control
      environments as set out in the latest Statement on Internal Control. In March 2006, as part of the Audit
      Commission’s Corporate Performance Assessment (CPA) the Council received a score of three out of a
      possible four for Use of Resources. This makes Purbeck the best scoring district in Dorset and one of the
      best districts in the country, as no district scored 4.

2.    REVENUE EXPENDITURE

2.1   Background

      The 2006/07 revenue budget is not supported by use of reserves. The contribution to reserves has achieved
      its planned peak of £200,000 as set out in earlier strategies. When considering the poor provisional Revenue
      Support Grant settlement increase for 2007/08, of only 2.1%, the Council increased the contribution to
      reserves by £16,000. The 2006/07 council tax is £138.60, an increase of 4.6%, which was within the
      Government’s target of below 5% and keeps the Council below the average council tax for shire districts and
      below the Assumed National Council Tax (ANCT).

2.2   Revenue Support Grant

      The Comprehensive Spending Review 2007 is currently awaited for estimates of future settlements covering
      the period 2008/09 to 2010/11. The following table shows the Council’s current projections for external
      support, comprising Revenue Support Grant and National Non-Domestic Rates.

      Table 1 – External Funding Support

                                                 2005/06   2006/07   2007/08    2008/09       2009/10        2010/11
                                                   £M        £M        £M         £M            £M             £M
        External support                          2.863     3.169     3.238      3.302         3.368          3.436
      Note: Extract from 2006/07 budget summary and projections, with the last 2 years assuming a 2% increase.


      2007/08 is the last year of the current three year Revenue Support Grant settlement. The settlement is poor
      at an estimated increase of 2.1% in cash terms. It should be noted, however, that in 2005 the Government
      indicated that it will fund new duties and the Revenue Support Grant for 2006/07 did, for example, include
      £199,000 in respect of the expansion of the Concessionary Fares Scheme.


2.3   Spending Pressures
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        It is in the nature of local government for there to be constant pressures for service improvements and,
        indeed, for new services. These pressures may arise from demands from central government, Councillors or
        as a response to public consultation. Clearly, mechanisms need to be in place for these pressures to be
        considered and prioritised and, if appropriate, for them to be financed. Increasingly the Council will position
        itself as an enabler, aiming to help people and communities to act independently, within a framework of
        support. The Council will only directly provide those services that other bodies will not provide.

        The net funding position has been forecast for the current and next four years. This forecast is based on the
        current level of services with council tax increases just below the current capping limit and assumes that one
        third of the required annual Gershon efficiency savings of £50,000 will be cashable.

        Table 2 - Revenue Budget Forecast Surplus/Deficit 2006/7 to 2010/11



                                                                 2006/07        2007/08      2008/09      2009/10      2010/11
                                                                     £m           £m           £m           £m           £m
                      Total external support - RSG and NDR           (3.15)       (3.25)       (3.30)       (3.35)       (3.45)
                      Council tax - assuming 4.9% increase           (2.70)       (2.80)       (2.95)       (3.15)       (3.30)
                      Maximum Spend                                  (5.85)       (6.05)       (6.25)       (6.50)       (6.75)

                      Existing level of services                      5.85          6.15         6.40         6.65        6.90
                      Funding (surplus)/deficit                       0.00          0.10         0.15         0.15        0.15

                      Gershon savings - assumes 33% cashable         (0.05)       (0.10)       (0.15)       (0.20)       (0.25)
                      Net Funding Position (surplus)/deficit         (0.05)         0.00         0.00       (0.05)       (0.10)



        Table 2 above shows that in the current year the authority should underspend by approximately £50,000,
        reflecting the Gershon savings. Thereafter there is funding surplus of £50,000, rising to £100,000 per annum.

2.3.1   Over the next few years the Council is aware of a number of spending pressures driven by both the Council’s
        decisions and national requirements. Table 3 below shows the impact of these known spending pressures on
        the Net Funding Position calculated in Table 2 above.

        Table 3 – Spending Pressures

                 Spending Pressures                            2006/07        2007/08      2008/09      2009/10      2010/11
                                                                 £k             £k           £k           £k           £k
                 Net Funding Position (surplus)/deficit            (50)              0            0         (50)        (100)
                 Job Evaluation                                                   250          200          200           200
                 Development Control - staffing growth                              50           50           50           50
                 Youth Travel                                                       50           50           50           50
                 Recycling                                                                     125          250           250
                 Net (Surplus)/Deficit                               (50)         350          425          500           450


2.3.2   To address the forecast funding deficits identified in Table 3 the Council needs to look at a variety of
        approaches, which will include efficiencies, identifying new income streams, reducing funding for non-priority
        services.

2.3.3   Efficiencies have already been mentioned in the tables above. Gershon requires 2.5% annual efficiencies,
        these targets are now identified in the Service Plans and progress against these efficiencies can be measured
        and monitored. The Council fully expects to achieve its targets, although many will not be cashable. The
        Council needs to encourage continued identification of efficiencies to help deliver against the budgeted
        deficits.



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2.3.4   New income streams need to be explored and business cases brought forward. Members have indicated that
        this could include projects with an element of risk, however, this would need to be fully explored and evaluated
        in the business case together with the identification of success criteria and exit strategies should the project
        fail to meet the specified criteria, thereby limiting the risk exposure.

2.3.5   Non-priority services need to be identified and strategies to reduce funding or curtail these services need to be
        considered by Members to enable revenue resources to be re-directed to the highest priorities. To facilitate
        this process an exercise is being undertaken in November/December 2006 to identify the services Members
        of the Council consider to be least important. The outcome of this exercise will be fed-back to Council to
        assist in formally determining which services funding should be diverted from. Heads of Service will then be
        charged with presenting the available options to Members on the future provision of those services. This
        exercise should be linked to setting financial objectives for each service as stated earlier.

2.4     Service Improvements

        Where potential service improvements represent a priority of central government but not one of the District
        Council, they will be implemented to the extent that government grant is available. The grant could be specific
        to the service or within the annual FSS settlement. If the Council needs to supplement the available grants
        from its own revenue resources, it will consult council taxpayers either specifically on the issue or as part of its
        general budget consultations.

        As set out in paragraph 1.1. the Council needs to move towards setting a financial objective for each service.
        This will be achieved over the life of this medium term financial strategy.

2.5     Balances

        The working balance for the General Fund is normally recommended to be between 1% and 5% of General
        Fund gross revenue expenditure. At the end of 2005/06 the Council had a General Fund balance target of
        £500,000, or 2.7% of General Fund gross expenditure. The balance will be reviewed annually, as part of the
        budget setting process. The factors considered when establishing the size of the balance and their impact are
        set out below:

                       size of the authority – smaller councils, such as Purbeck, have a lower asset and resource base to
                        be able to withstand budgetary problems. The balance is increased by 0.5% as a result;

                       tightness of budgets – the pressure on budgets in recent years has reduced the amount of slack
                        contained in them. The balance is increased by 0.5% as a result;

                       quality of financial systems and processes – the Council has strong systems and internal controls,
                        which will prevent many budget problems from arising. No increase in the balance is therefore
                        required;

                       quality of financial management information – financial management information is good, so that
                        Members and managers become aware of any budget problems on a timely basis. Budget profiling
                        introduced has been introduced to further improve the information available. No increase in the
                        balance is therefore required;

                       cash flow forecasting – has been improved in order to identify those parts of the year when excess
                        funds are available. No increase in the balance is therefore required;

                       overall accuracy of budgets – the Council has a history of minor underspends against the revenue
                        budget, demonstrating the level of control exercised. No increase in the balance is therefore required;

                       volatility of expenditure streams – expenditure streams tend to be stable with the only problem area
                        historically being the costs of homelessness, which has been stabilised through the Purbeck Housing
                        Trust contract. In addition, budget profiling has been introduced to improve the quality of budget
                        monitoring information and improve management’s opportunity to take corrective action. Job
                        evaluation will have a significant impact on the base revenue budget, whilst increases in council tax
                        are likely to continue to be restricted to below 5%. The balance is increased by 0.5% as a result;



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                     volatility of income streams – the Council has adopted a more prudent approach to income stream
                      estimates and has introduced budget profiling to improve the quality of budget monitoring information
                      and improve management’s opportunity to take corrective action if performance slips. The balance is
                      increased by 0.25% as a result.

      In view of the strengths and weaknesses outlined above, it is recommended that for the period of this strategy
      the balance should be fixed at approximately 2.75% of gross revenue expenditure, although this should be
      subject to annual review to ensure that it remains valid. Based on General Fund estimated gross revenue
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      expenditure in 2006/07 of £19M , the balance was set at £500,000 at 31 March 2006. As the current level of
      balance is being maintained any uncommitted budget underspends will be swept into the Council’s general
      reserves, to be used to finance capital projects and non-recurring revenue items.

      As part of the 2007/08 budget process, the level of balances was reviewed by the Chief Executive and Head
      of Financial Services. The review found the assessment remained valid with the General Fund Balance at
      2.75%. The Council’s estimated gross expenditure for 2007/08 is £21m. The balance has, therefore, been
      increased by £80,000 to £580,000, which will provide adequate contingency in the event of any unforeseen
      events occurring.

2.6   Contributions to Reserves

      In the 2002 medium term financial strategy, the Council reinstated planned contributions to its general
      reserves building over four years to £200,000. Prior to this, relatively small contributions had been made to
      reserves when revenue budgets were underspent. This practice was not considered sustainable in the
      medium term, especially as reserves are used predominantly to finance capital expenditure.

      Looking ahead the Council needs to maintain sustainability of reserves by either increasing them broadly in
      line with inflation or amending its non-recurring expenditure to align with contributions. Consequently, the
      following contributions to reserves are planned:

                                                 2006/07      2007/08         2008/09         2009/10         2010/11
                                                  £000         £000            £000            £000            £000
          Contributions to reserves                216          210             220             230             240

      The Council went debt free in March 2005, and has a current policy to stay debt free. However, should the
      Council at some stage change this policy, it will have greater flexibility in deciding whether it wishes to borrow
      to finance capital expenditure and would no longer be reliant on borrowing approvals from government. The
      prudential guidelines only require the Council to act prudently, only borrowing to the extent that it can afford to
      service the resultant debt.

2.7   Revenue Budget Strategy

      The Council’s objective is to maintain its council tax below the average council tax for shire districts. It is
      currently 8% below average. It is planned to be kept at around this level.

      The Council’s budget strategy is for a broadly no growth base budget as set out in the budget guidance issued
      by the Head of Financial Services. Growth items will only be considered by Council as part of the budget
      report and approved when the council tax is set in February each year. Members will minimise the approval of
      in-year supplementary estimates.

      The Council’s net investment income is a volatile income stream and it would not be prudent to base recurring
      revenue expenditure on interest estimates using unsustainable interest rates. This is because in future years
      when interest rates fall there is the potential for a significant deficit on the base budget even before
      consideration of any growth items. Council therefore agreed in February 2007, as part of the budget report,
      that the additional interest from a more realistic estimate will only be available to fund one-off growth items.
      The benefit of this approach is twofold; the base budget is not allowed to grow against a volatile income
      stream and it will, in most years, provide Members with a source of funds to meet one-off growth items.

      The Collection Fund surplus is similar to the interest estimate. The Collection Fund could be either in surplus
      or deficit and it would again be unwise to allow recurring revenue expenditure to grow when the Fund happens


      1
          As stated in the Revenue Budget and Council Tax for 2006/07 report, recommendation 3.4.a) to 24/2/06 Council meeting.
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      to be in surplus. Council therefore agreed in February 2007, as part of the budget report, that any Collection
      Fund surplus will only be available to fund one-off growth items.

      The Council has a robust revenue budget monitoring scheme in place to enable budget holders to identify
      potential problems early and act promptly. The scheme is based on monthly, profiled, commitment
      accounting, budget reports distributed on a hierarchical basis: budget holders; Heads of Service; and all
      services distributed to the Chief Executive (S151 Officer), Head of Financial Services and Internal Audit. In
      addition, this budget reports are repeated in the Council’s financial system, which is an on-line system with full
      drill down facilities to invoice images.

3.    CAPITAL EXPENDITURE

3.1   Background

      The Council’s policy is to carry out a maintenance programme so that, as far as possible, the future useful
      lives of its fixed assets are maintained. To this end the Council has put in place an Asset Management Group
      of officers.

      The Council’s capital budget is in the form of a capital programme which covers a period of five years. The
      programme comprises two parts the approved and unapproved programmes. The approved programme
      contains schemes which have received Council approval and authority to incur expenditure. The unapproved
      programme contains schemes which have Council approval in principle but does not confer authority to incur
      expenditure, other than minor preliminary expenses.

      Despite the transfer of the housing stock the Council’s capital programme will continue to incorporate the
      Housing Investment Programme (HIP) and the Other Services Programme. The HIP consists of expenditure
      on social housing and grants to private individuals for housing purposes. The Other Services programme
      contains all capital schemes not included in the HIP.

      For a scheme to secure approved status a report detailing: a financial appraisal of the scheme; its detailed
      revenue consequences; risk management issues; and impact on the council tax has to be submitted to Policy
      Group for consideration and then approval by Council. In addition, the necessary financing arrangements
      must be in place, including all necessary approvals obtained from Government.

3.2   Capital Finance

      The capital programme is currently financed in the following ways:

                     Capital grants and contributions from the Government and other bodies are used to finance specific
                      schemes;

                     Capital receipts, mainly from the receipt of a share of the income from the sale of former Council
                      houses by Purbeck Housing Trust (preserved rights to buy).

                     Reserves.

                     Borrowing can be used, particularly if the Government funds the revenue consequences through the
                      revenue support grant, although at present the Council is seeking to remain debt free.

      The general priority for use of funding sources is general capital receipts, capital reserves, reserves, LSVT
      receipt and borrowing or leasing, although officers will utilise the available resources to serve the best
      interests of the Council and report back to Members after the year end on the actual funding of the capital
      programme.




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     The current plan for financing the capital programme is summarised in the capital programme and set out in
     more detail below:

                                                     2006/07   2007/08   2008/09   2009/10   2010/11
                                                    Estimated Estimated Estimated Estimated Estimated
                                                      £000's    £000's    £000's    £000's    £000's
       Capital Expenditure
       Total expenditure                                  4478        4828         4162            923           402
       Financed by:
        Internal Sources: Capital receipts LSVT            480         120            0              0             0
                          Capital receipts                 822         321          213            213           213
                          Capital reserves                 160           0            0              0             0
                          Revenue reserves                 128         124          192            408            98
        External Sources - Government grants              2577        4075         3569            268            91
                          Partnership funding              311         188          188             34             0
       Total Financing                                    4478        4828         4162            923           402

       Net financing need for the year                         0           0           0             0             0



     From April 2004, the system of credit approvals was replaced by a regime based on prudential guidelines.
     These allow the Council to borrow to the extent that it is able to service the resultant debt. In assessing how
     much the Council is able to service, it has to use a variety of benchmarks and performance indicators on its
     financial strength.


     Following the transfer of the housing stock the Council repaid all of its external debt and set aside funding
     equal to its internal debt to achieve “debt-free” status with a nil capital financing requirement. It is the
     Council’s current policy to remain debt free for the next five years.

4.   CAPITAL RECEIPTS

     The Council has different categories of capital receipt: preserved right to buy, LSVT and general. Fifty percent
     of preserved right to buy receipts are earmarked to fund housing projects/expenditure, the remaining fifty
     percent being added to the general receipts. Investment income from the LSVT receipt was required to meet
     residual LSVT costs and therefore is not automatically available as a funding option and is only used after
     consultation with the Chief Executive. As capital receipts can only be used to fund capital, general capital
     receipts are the first funding option for capital expenditure.

     The table below shows the projected total value of capital receipts having allowed for capital funding needs as
     identified in the capital programme, approved and unapproved, 2006/07 to 2010/11.

                                                   2006/07   2007/08   2008/09   2009/10   2010/11
                                                  Estimated Estimated Estimated Estimated Estimated
                                                    £000's    £000's    £000's    £000's    £000's
       Capital Receipts
       Opening Balance                                 3,321       2,831       2,703       2,703         2,703
       Receipts                                          812         313         213         213           213
       Used                                          (1,302)       (441)       (213)       (213)         (213)
       Closing Balance                                 2,831       2,703       2,703       2,703         2,703




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5.    RESERVES

5.1   Background

      For many years the Council has used its general reserves to finance:

                  non-HIP General Fund capital expenditure;

                  non-recurring revenue expenditure, such as the Local Plan Public Inquiry.

      From 2003/04 the Council has made planned contributions to reserves, which increased by £50,000 p.a. until
      2006/07, when the planned contributions peak at £200,000 p.a. Hence forth it is proposed to increase the
      contributions broadly in line with inflation, as set out in paragraph 2.6.

5.2   Balances

      On 1 April 2006 the balance on the general fund amounted to £555,000 and on the Housing Revenue Account
      (HRA) £257,000. Following the transfer of its housing stock to a social registered landlord, the Secretary of
      State granted the Council approval to close its HRA from 4 April 2006. This will enable the Council to transfer
      the HRA balance to the general fund. It is anticipated that the balance will be moved to the reserves in
      anticipation of the outcome of job evaluation.

5.3   Reserves

      The table below shows the projected value of the reserves having allowed for known funding demands
      including the Capital Programme both approved and unapproved schemes.

                                                       2006/07   2007/08   2008/09   2009/10   2010/11
                                                      Estimated Estimated Estimated Estimated Estimated
                                                        £000's    £000's    £000's    £000's    £000's
          General Reserve
          Opening Balance                                     271          456          538      561      379
          Receipts (inc transfer from HRA)                    473          210          220      230      240
          Used                                              (288)        (128)        (197)    (412)    (102)
          Closing Balance                                     456          538          561      379      517

          Earmarked Reserves
          Opening Balance                                      116         116         116      116       116
          Receipts                                               0           0           0        0         0
          Used                                                   0           0           0        0         0
          Closing Balance                                      116         116         116      116       116

          Capital Reserve
          Opening Balance                                        9           4            4       4         4
          Receipts                                               0           0            0       0         0
          Used                                                  -5           0            0       0         0
          Closing Balance                                        4           4            4       4         4




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5.4   Earmarked Reserves

      The Council has a number of earmarked reserves including:

      Building Control Reserve

      This is maintained in accordance with SORP Guidance.

      Sports Centre Artificial Turf Pitch

      An annual contribution of £25,000 for ten years, in accordance with the Sport England ATP grant agreement
      to finance the “re-carpeting” of the pitch.

      Risk Management Reserve

      This reserve is used to meet one-off costs aimed at reducing or mitigating the risks faced by the Council.

      Business Centre Reserves

      These are operated in accordance with the various agreements.

6.    TREASURY MANAGEMENT

6.1   Background

      The Council’s approach to treasury management is detailed in its Treasury Strategy Statement approved by
      Council in February 2006. The Council’s consistent strategy on treasury management issues is one of
      caution. This strategy will continue for the foreseeable future.

6.2   Investments

      At 31 March 2006 the Council had the following investments

              a) Long term £3m

              b) Short term £2.75m

      The transfer of the housing stock has resulted in the Council having over £6 million invested in most months,
      with the exception of February and March when there is limited council tax income.

6.3   Borrowings

      At 31 March 2006 the Council’s was debt free. It is the Council’s current policy to remain debt free.

7.    FINAL ACCOUNTS

      The Council produces annual accounts in accordance with statutory and professional standards. The Council
      has a robust final accounts timetable in place and the accounts are supported by comprehensive working
      papers.

      The Statement of Accounts is published in accordance with statutory requirements. To improve accessibility
      to the public the introduction of summary accounts/annual report are being considered.




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