NORTH LONDON WASTE AUTHORITY AGENDA ITEM NO
REPORT TITLEREVENUE BUDGET AND LEVY 2015/16
REPORT OF
FINANCIAL ADVISER
FOR SUBMISSION TO DATE
AUTHORITY MEETING 12 FEBRUARY 2015
1. SUMMARY OF REPORT
The fourth review of the 2014/15 budget indicates that the Authority is currently estimated to have a revenue surplus of £11.943m at 31 March 2015, an increase of £1.793m compared with the third review. A further assessment of the budget and resource requirements for the year ahead indicates that the 2015/16 net budget requirement is £66.173m. This is a reduction of £0.882m compared with the 2014/15 approved budget and £3.330m lower than the 2015/16 medium-term forecast of £69.503m reported to the Authority in February 2014.
This review of the 2014/15 budget and the forecast for 2015/16 reflect the positive impact on the Authority’s financial position of operational changes which deliver significant savings principally in its Landfill Tax liability. Also having an impact is the new contract with LondonWaste Ltd which started in December 2014; although many prices are unchanged or are similar to the previous contract, the Authority benefits from more advantageous pricing in some areas. Continued good performance at LondonWaste Ltd allowed the Company to pay a final dividend of £2.5m in December giving a total of £5m in the year.
Both the 2014/15 review and the 2015/16 draft budget include an assessment of the resources required to prepare an application for a Development Consent Order (DCO) for a new Energy Recovery Facility (ERF) to replacethe current Energy from Waste (EfW) facility at the Edmonton EcoPark.
My report to the December meeting included a proposal that a standstill levy could be set in 2015/16 which would allow the retention of some forecast balances to help fund the 2016/17 budget. This proposal was made in recognition of the Authority’s changing cost base and the more limited scope, compared with recent years, for surplus balances to arise in the future. Since then, Authority officers have met with the Members’ Finance Working Groupand borough Directors of Finance to review and consider the key assumptions which underpinned the 2015/16 budget forecast. Both groups were content with the prospect of a standstill levy and the retention of any balances not required to achieve a standstill levy in 2015/16 so that these could be used to help fund the 2016/17 budget. The budget and levy proposals for 2015/16 have been prepared on this basis.
After use of forecast revenue balances of £8.311mthe Authority’s budgetwill require funding of £57.862m by constituent councils. It is proposed that £9.607m is funded through the non-household waste charging arrangement and £1.803m through the household waste charging arrangement, leaving £46.452m to be funded through the levy. This will enable the Authority to retain balances of £3.632m to help fund the 2016/17 budget.
2.RECOMMENDATIONS
The Authority is recommended to:-
(i)Agree that for2015/16the charge for non-household and chargeable household residual waste will be based upon the LondonWaste Ltd base gate fee plus a reduced landfill tax charge as set out in paragraph 6.15.1.
(ii)Agree the 2015/16 charges fornon-household and chargeable household waste as follows:
- Residual £105.26 per tonne
- Dry Recyclable £53.69 per tonne
- Food £56.40 per tonne
- Green £36.72 per tonne
(iv)Agree to use revenue balances of £8.311m to help fund the 2015/16 budget and thereby retain balances of £3.632m to help ease pressures on the 2016/17 budget.
(v)Determine the levy for 2015/16.
(vi)Note the medium term budget forecasts for 2016/17, 2017/18 and 2018/19.
(vii)Note that the 2015/16 levy will be apportioned in accordance with the alternative levy arrangements agreed by the constituent councils with effect from 2014/15.
(viii)Authorise the Financial Adviser to make the arrangements for collection of the levy and charges for household and non-household waste.
(ix)Approve the Prudential Indicators and agree the basis for calculating the Minimum Revenue Provision as set out in sections10 and 11 respectively.
Signed by the Financial Adviser:
Agreed by Mike O’Donnell
Date: 3rd February 2015
3.Introduction and Background
3.1At the Authority’s meeting on 12 December 2014 Members were provided with an up-to-date view of the Authority’s financial position, including an assessment of the budget and resource requirements for 2015/16. The total 2015/16 net budget requirement was estimated to be £65.585m. Members were also advised that there was a good prospect of the Authority being able to agree a standstill levy in February and that this would enable the Authority to retain estimated balances of c. £2.061m to help fund the 2016/17 budget.
3.2After the proposed use of revenue balances (£8.089m)it was estimated that the budget would be additionally be funded by £9.189m through the non-household charging arrangement and £1.855m through the chargeable household waste charging arrangement. The remaining costs would be funded by a levy of £46.452m comprising a base levy element of £43.604m, i.e. adecrease of £0.771m compared with 2014/15, and a HWRC levy element of £2.848m, i.e. anincrease of £0.771m.
3.3The December review also drew attention to the budget issues that would need to be addressed at this meeting and noted that the Members’ Finance Working Group (MFWG) would meet on 8 January to discuss the budget and levy prospects for 2015/16. It was noted that officers would also consult with borough Directors of Finance (DOFs) on the proposed use of balances.
3.4The MFWG considered the key assumptions which underpinned the 2015/16 budget forecast. The Group acknowledged that as the Authority only has a once-a-year opportunity to raise resources through a levy, it was important for it to agree a budget that was sufficiently robust and flexible to meet both its day-to-day statutory operational obligations and to ensure that it had sufficient resources to fund the costs of the Development Consent Order process. As a consequence, I believe that it would be fair to record that Members were supportive of the key assumptions underpinning the forecast budget.
3.5The Group also considered anearly forecast of the Authority’s resource requirements and levy prospects for 2016/17, and in view of the Authority’s changing cost base and the more limited scope for revenue balances to arise in the future, were content to retain any current surplus balances not required to achieve a standstill levy in 2015/16, such that these balances would then be available to help fund the 2016/17 budget.
3.6Officers met with borough Directors of Finance on 16 January. Consideration was given to the Authority’s budget and resource requirements for 2015/16 and also the budget and levy prospects for 2016/17. DOFs were also supportive of the proposal for a standstill levy in 2015/16 and theretention of revenue balances at 31 March 2015 to help fund the 2016/17 budget.
3.7This report provides an up-to-date review of the 2014/15 budget and presents for consideration a draft budget for 2015/16.
3.8Having taken account of the relevant factors the Authority must:-
(i)be satisfied that the proposed budget for 2015/16 will be sufficient to meet the net expenditure requirements for the year; and
(ii)determine the levy for 2015/16.
3.9Details of the approved budget and levy for 2015/16 must be notified to constituent councils for inclusion in their Council Tax charge before 15 February 2015.
3.10 This report contains sections covering the following:
Section 4 - review of 2014/15 Revenue Budget including forecast outturn and explanations of significant variances.
Section 5 - overview of the draft 2015/16 budget, including changes since presentation of the budget forecast to the Authority meeting in December 2014.
Section 6 - underpinning assumptions and further detail of the 2015/16 draft budget
Section 7 - basis for apportionment of the levy, and the tonnage data on which the apportionment will be based, together with the proposed levy apportionment by borough.
Section 8 – financial forecasts for 2016/17 to 2018/19
Section 9 and 10 – Prudential Indicators and recommended basis for calculating the Authority’s Minimum Revenue Provision in 2015/16
Section 11 – advice on reserves and balances and robustness of the budget process.
4.Review of the 2014/15 Revenue Budget
4.1At its meeting on 13 February 2014 the Authority agreed a budget of £67.055m to be financed by estimated balances of £6.907m, charges to boroughs for non-household waste and chargeable household waste of £10.691m and £2.005m respectively and a levy of £46.452m.
4.2In subsequent reviews, Members have been advised of:
£mHigher level of surplus balances brought forward from 2013/14 / (3.835)
Transfer of residual waste from Hendon to Edmonton (net saving) / (3.020)
Reduction in Non Fossil Fuel Obligation payments to LWL / (0.383)
Shredding and incineration of RRC waste (net saving) / (1.444)
Reduction in MRF and composting tonnages / (0.541)
Reduction in other site maintenance costs / (0.160)
Increased RRC operating and recycling costs / 0.152
Reduced corporate and administration costs / (0.292)
Deferment of waste condition survey / (0.200)
Additional sites and planning process costs / 2.040
Capital programme slippage and use of cash balances in lieu of borrowing / (0.897)
Reduced non-household and household income / 0.873
Improved dividend from LondonWaste Ltd / (2.500)
Other (net) / 0.057
Total / (10.150)
4.4As a consequence of previous reviews the Authority was forecast to have revenue balances at 31 March 2015 of £10.150m and should place the Authority in a strong financial position when determining the level of the 2015/16 levy. A fourth review of the budget has identified a number of further changes, the net effect of which is estimated to increase the level of surplus revenue balances likely to be available at 31 March 2015 by £1.793m to £11.943m. This review forms the basis of the 2014/15 revised budget. Details of the most significant changes and issues identified by the fourth review are discussed below.
4.5Transport, Disposal and Landfill: (- £1.420m)
4.5.1Data for the nine months to December 2014 indicates that compared with 2013/14 there could be anet reduction of 0.50% in the 2014/15residual waste stream, i.e. an increase of 0.52% compared with the third review forecast (see table 1 below).
Table 1 / September Forecast(Second Review) / December Forecast
(Third Review) / Current Forecast
(Fourth Review) / Variance between Third & Fourth Review Forecasts
% / % / % / %
Barnet / - 3.70 / - 3.01 / - 3.32 / - 0.31
Camden / + 0.01 / - 0.57 / - 0.30 / + 0.27
Enfield / - 0.25 / - 0.60 / + 0.75 / + 1.35
Hackney / +1.74 / +1.73 / + 1.91 / + 0.18
Haringey / + 0.63 / - 0.19 / + 0.18 / + 0.37
Islington / - 0.12 / +0.69 / + 1.73 / + 1.04
Waltham Forest / - 3.90 / - 5.06 / - 3.96 / + 1.10
Overall Position / - 0.86 / - 1.02 / - 0.50 / + 0.52
All boroughs except Barnet experienced growth in their residual waste stream in the third quarter. Given the 0.52% tonnage increase in the third quarter the fourth review allows for a further adverse change of 0.5% in the final quarter of the year. As a consequence the fourth review assumes a full year the residual waste stream for the year of584,203 tonnes, i.e. a decrease of 964 tonnes compared with the third budget review but anincrease of 1,071 tonnes or 0.18% compared with 2013/14.
4.5.2Whilst the above table indicates that there has been a net 0.5% reduction in the year-on-year residual waste stream the underlying position suggests that there is in fact greater underlying growth in the residual waste stream. This is because after allowing for the boroughs’ own forecast increases in recycling activity (13,887 tonnes) a further 14,958 tonnes of waste is forecast to enterthe residual waste stream, i.e. equivalent to an increase of 1.87% in the total municipal waste stream compared with 2013/14.
4.5.3Although at an individual borough level the picture is mixed, the overall position suggests that the Authority may now have entered a period of residual waste growth.
4.5.4The Authority’s waste contracts are linked to changes in the Retail Price Index (RPI). The recently agreed main contract with LondonWaste Ltd provides for a price review in December. The third budget review allowed for a year-on-year RPI increase of 2.3% (October index); however, the increase in the December index was1.6%. The latter has been reflected in the fourth review across all budgets where the December 2014 price review date is relevant.
4.5.5.1Also included within this budget category is the cost to the Authority of the annual contract price adjustment linked to electricity prices achieved by LondonWaste Ltd that is included in both the old and new contracts with the Company. This requires the Authority to contribute towards the reduction in the Company’s income that resulted from the cessation of the Non Fossil Fuel Obligation (NFFO) in December 1998.
4.5.5.2During the course of codifying the calculation methodology for inclusion in the new contract NLWA and LWL officers concluded thatthe current calculation of the ‘Cap’, which limits the value of the claim, should be adjusted. The Cap only comes into effect in certain circumstances and has been operative since 2009. As a consequence for 2014/15 and future years the value of the annual electricity compensation claim is expected to reduce by c. £0.260m per annum. This is allowed for in the fourth budget review and the proposed budget for 2015/16. Additionally, claims for previous years have been recalculated and will result in a one-offcost reduction to the Authority of £1.162m in 2014/15; this has been allowed for in the 2014/15 fourth review.
4.5.6The overall net effect of these changes is estimated to reduce transport, disposal and landfill tax costs by £1.420m in 2014/15 compared with the third review.
4.6Reuse and Recycling Centres (RRCs)
4.6.1Forecast operating costs are unchanged from the third review but the Authority has re-assessed its forecast of the revenue funding consequences of its acquisition of the Western Road RRC from LB Haringey. This cost in 2014/15 is expected to be £0.008m compared with £0.027 included in the third review.
4.6.2Table 2 below provides a summary of the current financial position for each borough including Operations Team and capital funding costs:
Table 2 / 1 / 2 / 3 / 4 / 5Change in RRC Balances at 1 April 2014
(As
reported
In June) / Total Cost to
Boroughs
2014/15 Original Budget / Total Cost to Boroughs
2014/15 Fourth Budget Review / Change in 2014/15 Total Cost to Boroughs / Estimated RRC Balances at 31 March 2015
(Columns 1 plus 4)
£ / £ / £ / £ / £
Barnet / - / 725 / 49 / (676) / (676)
Camden / (40,496) / 354,562 / 383,051 / 28,489 / (12,007)
Enfield / - / 453 / 31 / (422) / (422)
Hackney / - / 226 / 15 / (211) / (211)
Haringey / (63,276) / 727,828 / 695,091 / (32,737) / (96,013)
Islington / (3,153) / 610,929 / 579,593 / (31,336) / (34,489)
Waltham Forest / (17,131) / 944,528 / 1,041,247 / 96,719 / 79,588
Total / (124,056) / 2,639,251 / 2,699,077 / 59,826 / (64,230)
4.6.3RRC balances of £0.064m will be taken into account in calculating the RRC element of the 2015/16 levy. For most boroughs the positive balance will help fund their 2015/16 levy, but for Waltham Forest the negative balance will add to the 2015/16 levy.
4.7Commingled Income Payment Scheme (CIPS)/Income from the Sale of Recyclates
4.7.1Payments made to the boroughs under this scheme are set by reference to the income received by the Authority from its MRF contractors. Market prices continued to fall during the second half of 2014 and there is little sign at present of any significant pick-up in the remainder of 2014/15. As a consequence the Authority has reduced its forecast of the average income per tonne in 2014/15 from the £22.75 used in the third budget review, to £22.25. Given that market prices are by no means certain, and could fall further, boroughs may wish to take a more cautious approach when updating their outturn forecasts for 2014/15.
4.7.2The following table provides an indication of the potential income that participating boroughs may receive from the CIPS and reflects the cautious line taken by the Authority in its forecasting.
Table 2 / 2014/15CommingledDry Recyclable / 2014/15
Forecast CIPS
Payment
Tonnes / £’000
Barnet / 27,102 / 603
Camden / 17,084 / 380
Enfield * / 0 / 0
Hackney / 14,200 / 316
Haringey / 20,700 / 461
Islington / 14,500 / 323
Waltham Forest / 20,000 / 445
Total / 113,586 / 2,528
* Enfield does not currently deliver dry recyclable waste to the Authority for treatment.
4.8Miscellaneous Changes since the Third Budget Review: (- £0.248m)
4.8.1The cash flow on the Sites and Planning process costs hasbeen re-profiled resulting in a reduction in the forecast outturn of £0.0158m; this cost will now transfer to 2015/16.
4.8.2Corporate and Other Support Costs have been reviewed and reduced by £0.138m, mainly to reflect the lower usage of external support on matters other than the DCO process.
4.8.3Forecast recycling credit payments to third parties have been increased by £0.029m since the third review to allow for the increased level of claims in the second quarter; in overall terms the forecast outturn still falls within the original budget provision for these payments.
4.8.4The cost of providing Materials Recycling Facility services to boroughs has been increased by £0.045m to allow for a possible part year increase in service costs.
4.8.5Royalty payments received at Hendon are also forecast to be lower by £0.005m.
4.8.6 Finally, capital financing costs have reduced by £0.031m mainly due to the slippage in the purchase of the Western Road RRC.
4.9Charges to Boroughs for Non-Household Waste: (- £0.133m)
4.9.1In the light of nine months actual tonnage data and recent information provided by the boroughs the Authority is forecast to receive 90,526 tonnes of non-household waste in 2014/15 compared with the original estimate of 93,807 tonnes. As a consequence, income is forecast to reduce £0.712m compared with the original budget. This however is an improvement of £0.133m compared with the third budget review.
4.9.2Assuming boroughs continue to deliver waste at current levels the potential impact on individual boroughs is set out in Table 3 below. The figures indicate that Hackney, Haringey,Islingtonand Waltham Forest may need to make additional payments to the Authority. The other boroughs could be entitled to a refund. The final figures will be determined as part of the 2014/15 final accounts process.
Table 3 / 2014/15Original Estimate / 2014/15
Current Forecast / Variance
£ / £ / £
Barnet / 1,412,890 / 1,179,624 / (233,266)
Camden* / 3,746,125 / 3,057,609 / (688,516)
Enfield / 1,018,900 / 992,993 / (25,907)
Hackney / 1,844,600 / 1,854,828 / 10,228
Haringey * / 248,185 / 341,485 / 93,300
Islington * / 2,256,810 / 2,388,368 / 131,558
Waltham Forest / 163,070 / 163,202 / 132
Total / 10,690,580 / 9,978,109 / (712,471)
* Including income from non-household recyclable wastes.
4.10Charges to Boroughs for Household Waste: (+£0.008m)
4.10.1The Controlled Waste Regulations 2012 permit the Authority to charge for certain categories of waste. Accordingly, the Authority implemented new charging arrangements in 2013/14. As with non-household waste, boroughs make on account payments during the year which are adjusted as part of the annual accounts closure process. Compared with the original budget of 18,580, total tonnage, including recyclates, is forecast to increase to 18,732, i.e. an increase of 152 tonnes. Despite the increase, there has been a change in the balance of residual and recyclable wastes treated by the Authority such that income is forecast to reduce by £0.035m compared with the original budget and by £0.008m compared with the third budget review. The forecast suggests that Islington may need to make additional payments to the Authority while other borough could receive a refund.