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Report of Head of Finance Author: Simon Hewings E-mail: simon.hewings@southandvale.gov.uk Wards affected: All |
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Cabinet member responsible: Leigh Rawlins Tel: 01189 722565 E-mail: leigh.rawlins@southoxon.gov.uk Date: 17 December 2021 |
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Budget setting 2022/23 update report
RecommendationCabinet is recommended to note the report |
Purpose of Report
1. The purpose of this report is to inform the Cabinet of progress made to date in preparing the revenue budget for 2022/23 and the capital programme for 2022/23 to 2026/27, and to report on the funding issues that need to be considered when Council sets a revenue budget and capital programme in February 2022.
Corporate Objectives
2. The allocation of financial resources within the revenue and capital budgets needs to match the objectives agreed by the council.
Background
3. In February 2022 Cabinet will consider a report on the revenue budget for 2022/23 and the capital programme for 2022/23 to 2023/27 and will recommend these to council. This report updates Cabinet on progress to date with budget setting.
4. The revenue budget for 2021/22 agreed by Council in February 2021 was balanced by a significant draw on revenue reserves of £4.3 million. Whilst this draw reflected an anticipated increase in net costs due to the Coronavirus pandemic, a significant draw was anticipated to be required from reserves across all years of the Medium-Term Financial Plan (MTFP) and was predicted to be in excess of £5 million by 2025/26.
5. As noted in the budget setting report, this use of reserves was considered manageable in the period covered by the MTFP (in light of the reserves and balances available to the council and the council’s ability to vary budgets and redirect funding) but was not considered sustainable over the medium and long term.
6. The use of reserves highlighted in the February 2021 budget setting report, and the need to address them, was also highlighted by the council’s external auditor, EY when they addressed Joint Audit and Governance Committee (JAGC) in July 2021. Kevin Suter, Associate Partner, in addressing JAGC members, advised that:
“What I am flagging here is I need to be assured next year that those decisions are at least being prepared or considered in order to reduce that budget gap over time and before the councils, and this will apply to both South Oxfordshire and Vale of White Horse, before they get to a position where a S114 notice would be required because those reserves have been diminished to such a level.”
7. Over the summer officers discussed the budget situation informally with cabinet members to agree an approach to the 2022/23 budget setting round that would continue to address the financial challenges facing the council. Those discussions highlighted that, whilst a comparatively low-cost council, South Oxfordshire’s revenue situation was affected by a number of key issues:
· The council’s Band D Council Tax of £131.24 in 2021/22 is the eighth lowest in the country for a shire district council and is well below the national average of £198.96,
· The council had, unlike other councils, not benefitted from the business rates retention scheme,
· The council had benefitted from the “New Homes Bonus” funding stream but that was under review by government and was expected to be less generous in the future.
8. The approach to budget setting agreed with cabinet members for 2022/23 was that officers would undertake a thorough review of the base budget and, subject to what that process could achieve, a more managed approach to the use of reserves in future years would be adopted.
Base budget setting 2022/23
9. The starting point for building the council’s base budget 2022/23 is the 2021/22 base service budgets for service teams, of £20,308,954. This has then been updated for the following:
· opening budget adjustments, including the removal of one-off growth items relating to 2021/22
· addition of
- inflation, salary increments and other salary adjustments
- essential growth
· removal of costs relating to
- base budget savings.
10. In the MTFP agreed as part of the budget setting in February 2021, the base budget for 2022/23 was estimated to be £18,271,813. This included an estimate for inflationary pressures and essential growth.
11. Base budgets for 2022/23 have been constructed by heads of service and budget holders supported by finance business partners from the Strategic Finance Team. They have been scrutinised through a “base budget challenge” exercise undertaken by the Interim Head of Policy and Programmes and the Head of Finance supported by project accountants from the Strategic Finance Team. The challenge exercise, which took place during October and November focussed on the following key areas:
· Identification and removal of all surplus budgets and consolidation of one corporate contingency budget,
· Ensuring that all discretionary fees and charges increase by a minimum of five per cent to ensure all costs are recovered,
· Centralisation of certain budgets e.g. property, legal and IT to enable better financial control.
Officers have also engaged with the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Government Association (LGA) to benchmark the cost of services provided by the council.
12. Following the completion of the base budget challenge exercise, the base budget for 2022/23 is £16,271,080. This is just over £2 million lower than the 2022/23 base budget in the previous MTFP. This budget represents the budget proposals submitted by officers and it affords resources to allow the council to continue to provide services at the current standards (all other things being equal) and reflects previously agreed policy decisions.
13. These figures are provisional and may be subject to change as work continues on refining the budget. The paragraphs below identify how the budget requirement for 2022/23 has been reached.
2022/23 revenue base budget build changes
14. Appendix A.1 summarises the movements in the base service budgets from 2021/22 to 2022/23. The following paragraphs detail these movements.
Opening budget adjustments (appendix A.2)
15. A total of £3,028,930 is removed from the base budget for one-off items agreed in previous budgets.
Inflation, salary increments, and other salary adjustments (appendix A.3)
16. Together these total £596,821. For all council employees an increase in salary of 1.9 per cent is budgeted for 2022/23. Increments payable to council employees not at the top of their salary range total £135,553. Other salary adjustments represent a cost of £227,615.
Essential growth (appendix A.4)
17. These items total £1,185,901. They comprise additional expenditure which is considered unavoidable, and reflect changes that have occurred in the current year or which are known will happen in 2022/23. Given the value of these additional essential growth items they have been scrutinised during base budget challenge.
Base budget savings (appendix A.5)
18. These items total £2,471,182. These base budget savings are reductions in costs identified by officers which may be the result of more efficient working or previously agreed policy decisions, cost reductions outside of the council’s control, or correction to budgets.
Revenue contingency
19. Realising the level of base budget savings identified above is not without risk and budgets that could have withstood potential in year service pressures have been removed. In mitigation, officers feel it appropriate to increase the contingency budget from its previous base level of £200,000 to £400,000. (Note that the contingency budget was increased for 2021/22 for one-year only from £200,000 to £1,100,000 due to the Coronavirus pandemic).
Managed vacancy factor
20. The council has previously operated a managed vacancy factor level of four per cent i.e. it anticipates only spending 96 per cent of the employee budget due to, for example in year vacancies. Officers have concluded that this can be increased to five per cent.
In year savings target
21. In undertaking the base budget challenge exercise, officers consider that there is further potential to realise further savings from the base budgets from future exercises. An in-year savings target of £300,000 has been included in the base budget to reflect this.
22. In addition to the £300,000 identified above, officers are working on potential savings proposals in the following areas:
· Development management review,
· Front of house,
· Grounds maintenance.
23. The final budget to be proposed in February will reflect the progress of this work. It will also confirm the projected use of the remaining transformation budget, which was established in 2020/21 to fund works that would realise revenue savings.
Discretionary revenue growth and savings
25. Discretionary revenue growth and savings do not form part of the base budget build and none are therefore included in the budgets included here. Any such items that are brought forward as part of the final budget setting proposals in February 2022 must reflect activities linked to corporate plan priorities. Many such activities are already funded through the base budget and previously agreed growth items.
Investment income
26. In 2020/21 the council received £2.474 million in investment income. This was used as follows:
· £2.149 million to support the revenue budget for 2021/22; and
· £0.325 million reinvested in financial instruments.
27. Investment earnings for 2021/22 are available to finance expenditure in 2022/23 and are expected to be lower than earnings in 2020/21. It is currently forecast that £1.56 million will be earned in 2021/22. The Bank of England is expected to raise the base rate over the coming months, and projections of investment earnings are shown in table 1 below:
Table 1: projections of future interest
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2021/22 |
2022/23 |
2023/24 |
2024/25 |
2025/26 |
2026/27 |
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£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
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Forecast interest earnings |
1,560 |
1,777 |
1,899 |
2,000 |
1,883 |
1,761 |
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Less unit trust income |
350 |
400 |
400 |
400 |
400 |
400 |
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Forecast distributable interest |
1,210 |
1,377 |
1,499 |
1,600 |
1,483 |
1,361 |
28. The current base budget assumes that £0.35 million of the forecast distributable investment interest of £1.56 million expected to be earned in 2021/22 will be reinvested in financial instruments, with the balance used to fund revenue expenditure in 2022/23.
Use of reserves and other funding
29. The proposed transfers from earmarked reserves total £487,090 and reflect:
· The transfer from reserves of treasury income earned in 2021/22 and earmarked to support the revenue account in 2022/23,
· The transfer to reserves of treasury income earned in 2022/23,
· Other transfers to / from the revenue grants reserve.
Capital programme 2022/23 to 2026/27
30. The capital programme has been reviewed in detail by heads of service in conjunction with finance staff as part of the budget monitoring process and has been changed to reflect recent decisions and current expectations of the spending profile. An updated programme, reflecting these changes, is attached as appendix B. The programme also includes a statement of how it will be funded. As with revenue expenditure as identified above no discretionary growth beyond that previously agreed has been included in this capital programme.
31. Following the Cabinet report in November on funding capital projects from Community Infrastructure Levy (CIL), the informal member working group has begun meeting to discuss projects that could be funded from CIL that could be included in the budget. Items recommended by that group and agreed by Cabinet will be included in the budget proposals in February.
Government funding for revenue expenditure
32. At the time of writing the government was yet to announce the local government financial settlement for 2022/23. The settlement is usually provided before the parliamentary recess, which this year is scheduled for 16 December, so it is hoped that more information will be available to Cabinet when it considers this report, either by an additional paper or through a verbal update.
33. The level of future local government funding has remained uncertain as government has consulted on:
· Fair funding review,
· Business rates retention,
· New Homes Bonus.
34. As part of the Comprehensive Spending Review 2021, it was announced that councils would see an increase in “core revenue spending power” for 2022/23 of three per cent. For 2021/22, core revenue spending power for councils, the calculation of which includes retained business rates, council tax and New Homes Bonus, increased nationally by 4.5 per cent. However, for this council the increase was 2.6 per cent, which reflected a 1 per cent reduction in government grant funding, with the balance made up by an increase in council tax.
35. It remains to be seen whether the council will receive a one-year settlement for 2022/23 or a multi-year settlement, and to what extent the settlement reflects the outcomes of the reviews highlighted above and, if so, how they impact the council’s future finances.
Issues for consideration
36. The paragraphs below set out further issues that need to be considered before the final budget for 2022/23 is set by council in February 2022.
Council tax
37. In 2021/22 the council increased council tax by £5, the maximum permitted without triggering a referendum. The MTFP estimate for 2022/23 assumes that council tax would also increase by £5 assuming the same referendum principles apply. The financial settlement will propose draft referendum principles for council tax for 2022/23.
Communities grant funding
38. Each year the council has to make an explicit decision regarding the level of funding for community grants. In 2021/22 £500,000 was made available representing:
· £180,000 for individual councillor grants,
· £320,000 for the communities’ capital grants scheme.
39. The draft budgets proposed here assume the same amounts will be available in 2022/23.
Future prospects
40. Appendix C of this report presents an MTFP for the council, which quantifies the financial pressure on the council over the medium term. It assumes core revenue spending power will be maintained at the current level. It also incorporates assumptions on interest income, and other known pressures on the council, such as inflation and salary increments.
41. Included within the MTFP is an estimate of costs associated with exit and service transformation required when the Five Councils Partnership contract ends in September 2025. It is proposed that the council will, as allowed under the rules for the flexible use of capital receipts, fund these costs, anticipated to be around £1.5 million, from those receipts. The MTFP also reflects the estimated costs and income associated with the Didcot Gateway regeneration scheme.
42. As a result of the work undertaken through the budget challenge process, the future projections represent an improved position as compared to that reported in February 2021. In each year of the MTFP period there is still a draw on reserves to balance the budget but this is much reduced compared to previous estimates. The estimated draw is shown in the table below. Clearly this position reflects no increase in spend to support delivery of corporate plan priorities, and reflects officer estimates regarding future local government funding and is subject to change.
Table 2: use of revenue reserves during MTFP period to balance the revenue budget
43. The council’s MTFS states that the council will hold £50 million of investments of which up to £35 million can be invested in capital schemes that will produce a return of certainty. The remaining balance can be invested in treasury investments. Whilst the treasury investments may in some cases be capable of being realised, investment in capital schemes is not capable of being realised. Such principles may need to be reviewed and potentially adjusted in accordance with the level of future government funding.
44. As at 31 March 2027 the council is currently projected to have invested or earmarked at least £30 million of the £35 million permitted in capital schemes, including an ongoing £15 million loan to South Oxfordshire Housing Association. A further £15 million has been invested in long term financial instruments.
45. Excluding the £50 million investment, the council is projected to hold £20.8 million of general revenue balances and £7.7 million earmarked revenue reserves as at 31 March 2027. It is also projected to hold £5.2 million of usable capital receipts.
Climate and ecological impact implications
46. There are no direct climate and ecological impact implications arising from this budget update report.
Financial Implications
47. These are detailed in the body of the report.
Legal Implications
48. The Cabinet needs to make recommendations to Council on its spending proposals. Under the Local Government Act 2000 it is Council that must agree the revenue and capital spending plans, and then set the council tax. Council will meet on 17 February 2022 in order to set the budget, and the council tax (including amounts set by Oxfordshire County Council and the Police and Crime Commissioner for the Thames Valley).
Conclusion
49. This report brings together all known, relevant income and expenditure and funding information. This should aid members in understanding the major issues to be faced in setting the 2022/23 budget and allow them to consider and challenge that information before council sets its 2022/23 revenue and capital budget in February 2022.
Appendices