PORTSMOUTH HOSPITALS NHS TRUST Policy No. 11.12
POLICY AND PROCEDURE
Title Budget Setting Policy – 2009/10
Reference number 11.12
Manager / Director of Finance & Investment committee Finance Committee responsible
Date issued 14.02.2009
Version 1
Review date January 2010
Equality Impact
Assessment has N/A been applied to this
policy
Author Ft Finance manager
Ratified by Hospital Management Committee (27/01/09) Amendments record
Date Page Comments Approved by
V1.0 (12/08) Produced by FT Finance V1.1 (01/09) Sec 7 Manager
& 9 Amended by FT Finance
Manager following meeting with
DoF 23/12
Contents:
Page Number
1 Introduction 2 2 Budget Setting Principles 3 3 Income 4 4 Pay 4 5 Non-Pay 5 6 Savings/CIP 5 7 Reward/Levy for Prior Year Outturn 6 8 Growth/Cost Pressures 6 9 Service Developments 6 10 Activity Changes 6 11 Reserves/Contingencies 6 12 Other Budget Adjustments 7 13 In-Year Budget Adjustments 7 14 Management of Budgets 7 15 Approval of Expenditure 7 16 Performance Management 8 17 Budget Profile 8 18 Budget Setting Timetable 8 19 Review of Budget Setting Policy 8
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1. Introduction
Budgets are produced annually following the agreement of the Financial Framework which is
prepared in accordance with the Operating Framework. The budgets produced aim to deliver the agreed Financial Framework, and to build a robust financial base for future years.
This Budget Setting Policy should be read in conjunction with the Budget Setting Guidelines 2009/10 which spell out the principles in detail.
This budget setting policy covers all revenue operating budgets, i.e. those for income, pay and non-pay.
The starting point for all budgets is the recurrent baseline, rolled forward from the previous year.
Budgets are uplifted annually for inflation, but this isn’t necessarily a straight-line uplift across all
budget headings. This is detailed further below.
Savings/Cost Improvements are integral in delivering the planned financial position. Budgets will be reduced accordingly, and Divisions must develop savings plans in advance of the new financial year commencing in order to balance their budgets. Savings will normally result from a combination of divisional schemes and corporate workstreams.
A timetable will be prepared by the Finance Directorate to provide key milestones and to outline responsibilities. Budgets must be as complete and robust as possible to ensure in-year reporting is consistent with the financial plans submitted to external bodies (i.e. DoH, SHA, Monitor etc).
In order to understand how budgets have moved from 2008/09 current budgets to 2009/10 proposed budgets, a control spreadsheet will be maintained by the Deputy Director of Finance. Each Division will ultimately have a budgetary control total which they will be expected to balance their opening budget for 2009/10 to.
The main items that will determine control totals for 2009/10 are as follows:
; Start Point: 2008/09 Budgets (As at Month 7)
; Less Non-Recurrent Funding
; Add Full Year Effect of 2008/09 Funding
; Adjust for anticipated Month 7 to Month 12 funding adjustments
; Activity/income adjustments (SLA 2008/09 to SLA 2009/10)
; Inflationary adjustments (as per tariff uplift)
; Growth / Cost Pressure Funding (locally agreed)
; Inter-Divisional Transfers
; New Hospital adjustments
; Less CIP target 2009/10
; End Point 2009/10 Opening Budgets
The above is a preliminary list and is by no means all inclusive, the Budget Setting Guidelines should be referred to for further detail, but the sections below outline the requirements.
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2. Budget Setting Principles
There are several key principles that underpin the Trust’s budget setting for 2009/10:
2.1 Consistency across business planning
At the same time as the Trust is preparing financial budgets for the year ahead it is also preparing activity and workforce plans for each service. The importance of these three items being consistent cannot be overstated.
In theoretical terms the activity plan should come first. This will outline the levels of work that the Trust is expecting to perform in 2009/10 and as a by product will also inform the level of income associated with that work. The workforce plan should come next, in that this should be a robust assessment of the workforce required to perform said level of activity. The financial plan should then be the final item to be concluded and should detail the level of resource required to perform the activity required.
The reality is that the planning process is never quite as smooth as outlined above. Activity plans are often delayed by the complexity of negotiations with PCT’s and workforce plans often
confused by the difficulty in getting a robust starting point. Nevertheless wherever possible, Divisions, specialities and those corporate leads involved in the business planning process must ensure that they keep these three items as consistent as possible throughout the planning process. Failure to do so will mean starting the year with different baselines for activity, workforce and finance which will inevitably weaken the monitoring information produced during the year.
2.2 Divisional ownership of income and expenditure
One of the aims of budget setting is to ensure that Divisions start the year with an expenditure target that is consistent with the planned activity levels agreed in SLA’s with PCT’s.
Building on this principle, it is recognised that activity levels during the year will vary and in some cases will exceed those agreed with PCT’s. Given the Trust’s clearly stated desire to move to a business unit approach, it is important therefore that any contract over/under performance is clearly recognised within Divisional Financial positions.
This will build on the system in place over the last two years where Divisions have been allocated additional budget in respect of over-performance. The exact nature of the system to be introduced in 2009/10 is to be agreed with Divisions but the preference is for SLA income to be devolved to Divisions with any over or under performance being recognised through adjustments in actual income rather than through budgetary adjustments as is currently the case.
2.3 The plan is the plan – budget adjustments to be minimised
A further principle to be established for 2009/10 is to minimise budget adjustments wherever possible. Budget adjustments (especially those within Divisions) can be extremely time consuming and often serve to make meaningful analysis of the financial position more difficult. The clear aim for 2009/10 is to ensure that there is one plan and then variances are managed and explained accordingly. This should enable there to be a much clearer focus on actual levels of income and expenditure and helped to improve the clarity of financial reporting throughout the Trust.
2.4 No central pots
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As an extension of the principle above, a further aim for 2009/10 has to be to eliminate the belief that there are central pots of money to be allocated to support Divisional cost pressures or developments. Divisions will start the year with an expenditure budget that allows them to deliver
activity as per the agreed SLAs and will also have ownership of income associated with any
contract over-performance. Given this, it cannot be anticipated that there a further pots of money to be accessed. The only exception to the above is the situation where there may be centrally allocated money for a specific purpose where there is a timing issue in getting the funding allocated to the correct departmental budget.
2.5 Budgets to be as realistic as possible
It is important that the budgets set for 2009/10 are an accurate representation of what the Trust is expecting to happen in terms of both income and expenditure. The usefulness of budgets as a tool for both monitoring and performance management purposes is soon diluted if budgets do not accurately reflect spending plans. This aim is often constrained however by the requirement to submit a balanced plan and the discrepancies between the Trust and PCT’s regarding activity (and hence income) projections for the year ahead. The result of this can mean that assumptions have to be made about expenditure reductions that will be required to ensure a balanced plan.
In common with 2.2 above, the aspiration for 2009/10 has to be for Divisions to start the financial year with a budgetary target that is fair and achievable. It is recognised that in some cases this may require an element of rebasing to ensure that this is achieved. However any such rebasing will only be based on clear evidence that a Divisional budget is underfunded, such as establishing a link to the Service Line Reporting work that the Trust has produced. It would be unacceptable to adjust a Divisional budget simple on the grounds that it is overspent. Rewarding those who fail to deliver against budgetary targets without clear and undisputable evidence that the budget is incorrect will only serve to further undermine the value of budgets as a control mechanism. Any such rebasing exercise will clearly need to be assessed in terms of the broader affordability of the Trust’s financial plan as a whole.
3. Income
PCT SLA Budgets
Service Level Agreements with PCT’s will be based on the 2009/10 payment by results guidance and supporting tariff information published by the Dept of Health.
Both the Trust and PCT’s should set budgets that are consistent with signed contracts, although it
is recognised that this may prove difficult if PCT’s approach contract negotiations with unrealistic expectations of activity projections for 2009/10.
Divisional Income Budgets
Will be set according to the judgement of Divisions and their respective finance managers.
3.1 Inflation
Inflation is applied to all clinical income based upon the published national payment by results tariff uplift.
Inflation on non-clinical income will be applied with rates varying depending upon the nature of the income.
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4. Pay
Finance Managers will discuss and agree 2009/10 pay budgets with relevant budget holders. Whilst 2008/09 staffing budgets may provide a useful reference point, changes in activity and CIP requirements must be carefully considered in setting 2009/10 budgets. Since SLA’s may not be
finalised until February/March it will be necessary for a first attempt to be prepared based on
current SLA levels.
4.1 Pay inflation
Inflation will be applied to uplift all pay budgets to accommodate the impact of the 2009/10 pay awards.
4.2 Incremental Drift
The tariff uplift is expected to incorporate an allowance for incremental drift, and Divisional budgets will be increased accordingly. Should this be insufficient to cover all incremental drift, any shortfall will need to be managed by Divisions.
4.3 Maternity Leave
A central reserve will be created to cover 100% of the cost of those on maternity leave, with recharges being made during the financial year to enable division’s to backfill.
5. Non-Pay
Finance Managers will discuss and agree 2009/10 non-pay budgets with relevant budget holders. Any additional recurrent monies for over-performance should be used to address deficiencies in non-pay budgets to ensure that 2009/10 budgets are as realistic as possible.
5.1 Non-pay inflation
Non-pay inflation is only allocated to specific areas. These are:
; services provided by other NHS Trusts,
; the cost of inflation on Patient Transport Services,
; the increase in premiums for the Clinical Negligence Scheme,
; Utilities,
; Maintenance Contracts
; Other contracts subject to an inflationary increase
Inflationary uplifts on other non-pay budgets will only be considered on request to the Deputy Director of Finance.
6. Savings /CIP
6.1 Savings/CIP Target for Forthcoming Financial Year
Savings are necessary to deliver the Trust’s financial targets and to deliver the national efficiency requirement as dictated within the tariff uplift.
The starting point for allocating savings targets for the new financial year is to determine the overall target. Given the need to reduce costs to offset the impact of the unitary charge associated with the new hospital in 2009/10, it is anticipated that Divisional savings targets will be in the region of 5% of total initial budget for 2009/10.
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Each Division is required to develop a financial plan for 2009/10 that demonstrates how they will meet the level of challenge, detailing how savings will be delivered. Savings are expected to comprise a combination of divisional schemes and corporate workstreams.
These plans should be in place prior to the new financial year commencing, although it is recognised that it will be challenging given the scale of the target. Divisions will be expected to
deliver a minimum of 40% of savings plans by Month 6.
6.2 Prior Year Savings Targets
It is expected that Divisions will have plans in place to eliminate all prior year savings in advance of the new financial year commencing. It will not be acceptable to commence the 2009/10 financial year with negative budgets that relate to non-achievement of prior year savings targets.
Once finalised, the savings target will be deducted from Divisional budgets prior to the start of the financial year. A key principle is then to ensure that as plans are developed and implemented that individual budget lines are reduced accordingly rather than the budget simply being held on a ‘savings target’ subjective code.
7. Reward/Levy for Prior Year Outturn
Any rewards/levies will be in line with the agreed SLM incentive framework.
8. Growth/Cost Pressures
Through the budget setting process, a list of growth/cost pressure items will be collated and submitted to EMT for prioritisation and approval. Where items are approved Divisional budgets will be adjusted accordingly. This can include potential rebasing of some budgets to reflect the outcome of Service Line Reporting where it can be demonstrate that historical budgets are particularly unrepresentative. As ever, affordability will be a constraining factor in this process.
9. Service Developments
Funds will only be allocated once business cases have been approved through the Trust Planning Committee.
10. Activity Changes
Divisional budgets will need to be adjusted to reflect changes in activity baseline agreed with PCT’s. This may present timing difficulties due to the fact that SLA’s are unlikely to be finalised until the end of February. Given that the detailed work on budget setting will need to be concluded before then it will be necessary to draft budgets based on activity information produced by Divisions and the Performance team as part of the business planning process and then adjust based on what is ultimately agreed.
11. Reserves/Contingencies
Given the scale of the financial challenge facing the Trust in 2009/10, reserves provision will be kept to a minimum as the clear priority is to finance the running of the new hospital. This is in keeping with the principle that there will be no central pots to support Divisional cost pressures or developments in 2009/10 as the Trust looks to move towards a more autonomous business unit approach.
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Initial reserves may be set up to provide for some of the funding the Trust receives as part of the National Tariff uplift. However the aim will be allocate this funding as soon as possible to the appropriate areas.
Only the Director of Finance & Investment and Deputy Director of Finance may authorise
allocations from reserves.
12. Other Budget Adjustments
12.1 Inter-Divisional Transfers
The budget setting process will recognise where services are moving between divisions and ensure these are appropriately recognised.
12.2 New Hospitals Adjustments
The move into the new hospital in June 2009 presents a huge additional challenge to the 2009/10 budget setting process. The aspiration must be for detailed information about the configuration of services in the new hospital and associated budgets to be known and calculated before the start of the 2009/10 financial year. Where this is achieved then budgets can be set up to reflect this. The reality may well be that for certain services this information may not be finalised. In this case plans will be set on the information that is available at the time.
13. In-Year Budget Adjustments
A further principle to be established for 2009/10 is to minimise budget adjustments wherever possible. Budget adjustments (especially those within Divisions) can be extremely time consuming and often serve to make meaningful analysis of the financial position more difficult. The clear aim for 2009/10 is to ensure that there is one plan and then variances are managed and explained accordingly. This should enable there to be a much clearer focus on actual levels of income and expenditure and helped to improve the clarity of financial reporting throughout the Trust.
14. Management of Budgets
Budget holders are expected to be fully involved in setting their budgets. Financial Management will liaise with budget holders to ensure budgets are complete and accurate. Budget holders will be required to formally ‘sign off’ their budgets.
Budget holders must manage the budget within the levels set, whilst observing the Trust’s Standing Financial Instructions.
Budget holders must not be responsible for their own Pay Budget or Non-Pay Budget directly related to their pay i.e. travel expenses.
15. Approval of Expenditure
Expenditure must be approved in line with the Standing Financial Instructions.
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Budget holders are delegated to approve expenditure within specified limits. There is an approved list of managers who are authorised to place requisitions for the supply of goods and services, together with the maximum level of each requisition.
The line manager must approve all payroll and/or travel and subsistence expenditure. The line manager/budget holder must seek authorisation for their own payroll and/or travel and
subsistence expenditure.
Purchasing cards must be used appropriately, for Trust related expenditure. Should the expenditure relate to travel or subsistence for the individual holding the card, this expenditure must be approved by the individual’s line manager, and in line with the Trust’s purchasing card policy.
16. Performance Management
The target for each Division is to achieve at least break-even or better by the end of 2009/10, with plans produced that detail the expected trajectory towards this target in terms of the monthly bottom-line financial position, substantive actual WTE’s and planned expenditure on bank and agency staff. Divisions will be performance managed against these targets.
The Trust’s Performance Framework will determine the level and frequency of performance management, but Divisions will be expected to deliver their financial targets in addition to other productivity and financial/workforce performance measures.
17. Budget Profile
Monthly Management Accounts should be prepared with same principles as if we are preparing final accounts (i.e. on an accrual basis). Finance Managers should follow this principle in setting up budget profiles for 2009/10. Matching expenditure to budget or vice versa will only be permitted with the authorisation of the Deputy Director of Finance.
A traditional weakness within NHS budget setting is the failure to ensure budgets take account of Winter Pressures. All finance managers and budget holders are asked to consider the potential impact of Winter pressures as part of the budget setting process.
18. Budget Setting Timetable
The Key Milestones for the 2009/10 Budget Setting Process are as follows:
thOperating Framework issued by Dept for Health Dec 9 2008 thPHT Budget Setting Guidelines issued Dec 11 2008 thInitial Financial Plans submitted to SHA (high Jan 16 2009
level) (tbc) st1st Cut of PHT budget setting completed (Trust Jan 31 2009
level) th2nd Cut of PHT budget setting completed Feb 28 2009
(Divisional Level) thContracts with PCT’s agreed for 2009/10 Feb 28 2009 thFinal Adjustments to 2009/10 PHT budget made Mar 13 2009 thFinal submission to SHA of Financial Plans Mar 13 2009
(tbc) stFinal Budgets for 2009/10 to Board for approval Mar 31 2009
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19. Review of Budget Setting Policy
This policy will be reviewed on at least an annual basis, or to take into account any future
developments regarding changes in financial reporting/budget setting.
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