1. Finance and Budget Scrutiny Select Committee Introduction to local government finance

2. Agenda Revenue vs capital The Council budget –The balancing act –Why budget? –Key activities –Approaches to budget setting [FBSSC only] –Budget variances Retention of business rates Treasury management [FBSSC only] –Treasury management –Counterparty risk –Controls and governance Recommended reading

3. Revenue vs capital Revenue funded by: Council tax Central government grants Business rates Fees and charges Capital funded by: Capital receipts Grants Borrowing Contributions from the revenue budget

4. The balancing act Income Expenditure RSG Grants Business rates Council tax Rents Fees and charges Employees Premises Transport Supplies and services Capital financing

5. Why do we need to budget? Planning Monitoring Controlling Measuring performance

6. Key activities Previous year o closure of accounts o audit of accounts Current year o budget monitoring & control o budget updates o updating forecast outturn Next year o provisional/final grant settlements o public consultation o detailed estimates o considering saving/efficiency proposals o finalising formal budget proposal o medium term financial strategy

7. Approaches to budget setting Incremental budgeting + Simple, focuses on changes - Historic, inconsistent with effective planning Zero-based budgeting (ZBB) + Justifies activities, prioritises resources - Resource intensive Other o Activity-based budgeting (ABB) o Planning, programming budgeting systems (PPBS) o Rolling budgets

8. Variances can occur due to: Monitoring budgets Delays in processing payments/income Uneven spending patterns Incorrect profiling of budgets Mis-codings Centrally managed budgets e.g. repairs and maintenance Activity/demand changes Incorrect budget assumptions Poor management of resources

9. New developments: business rates Position up to 2012/13 –Collected business rates as an agent for the government –Rates set centrally –Business rates redistributed by govt according to perceived need –Redistribution NOT connected to amount collected –SCC net gainer From 2013/14 –49% retention by collecting authorities –System of tariffs and top-ups to set equitable starting position –System of levies and safety nets to protect big losers –Rates still set centrally –Benefit: authorities will keep 49% of any incremental increases in rates collected

10. Business rates: illustration

11. Treasury management (TM) "The management of the organisation's cash flows, its banking, money market and capital market transactions and loan management; the effective control of risks associated with those activities; and the pursuit of optimum performance consistent with those risks.“ Management of RISKS –Counterparty (creditworthiness) –Liquidity –Interest rate Predicting the future… Security of principal always more important than yield or liquidity

12. TM counterparty risk (for investments) Institutions on Sector’s weekly credit list (creditworthiness) –Credit ratings (Moody’s, Fitch, S&P) –Modified by Sector’s expertise –Recommend durations, not £ limits Local authorities and government bodies EU only with Aaa sovereign rating Aaa-rated money market funds (MMFs) Our annual investment policy defines individual limits (£10m)

13. TM controls & governance Treasury management strategy statement –Treasury management strategy –Annual investment strategy –MRP (minimum revenue provision) policy Treasury management practices (TMPs) London Code Legislation/regulation Prudential code/prudential indicators –Annual change in capital financing requirement –Ratio of financing costs to net revenue stream –Borrowing limits –Maturity limits –Fixed/variable interest rate exposure –etc The role of this committee

14. Recommended reading On the finance library intranet page at http://intranet.salford.gov.uk/customer/finance/finance- accountancy/finance-links.htm A brief guide to local government finance for councillors (CIPFA) A comprehensive guide to local government finance (CIPFA)