Issue - meetings

To consider a report on the financial position in relation to the PFI contract

Consideration was given to a report on the financial position and Reserve in relation to the PFI contract.

The purpose of the PFI Reserve was to smooth out timing differences over the 30 year period of the agreement.  These relate to timing differences between the receipt of funds by the Council and the amounts released by the Council towards the monthly Unitary Payments.  The Reserve had been largely left untouched during 2010/11 as the timing of transactions coupled with very low interest rates meant that there was not any in year surplus to be invested.  Any surplus balances in the reserve are invested and carried forward to cover the projected deficits in future years, with the Reserve ultimately balancing at zero when the agreement ends.  The current Reserve balance was £1,550,000.

The current position masked underlying potential problems that would occur going forward.  Main areas of concern were the affordability issues being experienced by both Councils and therefore the ability to make anticipated contributions to the Reserve in the short term.  These contributions were anticipated from two revenue sources – the Adult Social Care budget which was under considerable pressure, and Supporting People monies for which the funding stream had changed.

The current economic climate with the consequential effect on interest rates would also affect the reserve going forward. Interest was planned at 4.5% per annum on invested funds, whereas the current rates generated little in excess of 0%.  If the current position continued in the longer term it would have a material adverse effect on the Reserve.  Also of relevance was the impact of inflation on the elements of the contract. It was anticipated that over the first five years of the contract the investment returns would be lower than planned but that inflationary levels would be lower, in part compensating for the loss of investment income.

In line with the formal review of the care contract, a formal review of the Reserve would be undertaken every five years.  Informally the Reserve would be reviewed annually and report to the Board. 

RESOLVED:

That the contents of the Financial Report be noted.