Report to:Cabinet |
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Scrutiny CommitteeCouncil |
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Report of Head of Finance Author: Simon Hewings E-mail: Simon.Hewings@southandvale.gov.uk Cabinet Member responsible: Leigh Rawlins Tel: 01189 722565 E-mail: Leigh.Rawlins@southoxon.gov.uk To: CABINET 3 February 2022 To: SCRUTINY COMMITTEE 7 February 2022 To: COUNCIL 17 February 2022
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Revenue Budget 2022/23 and Capital Programme to 2026/27
Purpose of report
1. This report:
· brings together all relevant information to allow Cabinet to recommend to Council a revenue budget for 2022/23 and a capital programme for 2022/23 to 2026/27;
· recommends the prudential indicators to be set by the council in accordance with ‘the Prudential Code’ introduced as part of the Local Government Act 2003;
· contains the opinion of the council’s chief financial officer on the robustness of estimates and adequacy of the council’s financial reserves;
· contains the Medium-Term Financial Plan (MTFP) which provides details of the forward budget model for the next five years.
Strategic objectives
2. The allocation of financial resources within the revenue and capital budgets needs to match the objectives agreed by the council.
Revenue budget setting 2022/23
Background
3. 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.
4. 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.
5. 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.”
6. 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.
7. 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.
Revenue base budget setting 2022/23
8. The starting point for building the council’s base budget 2022/23 is the 2021/22 base service budgets for service teams of £20,308,245. 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.
9. 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 pressure and essential growth.
10. 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.
Budget composition 2022/23
11.Appendix A.1 summarises the movements in the base budget from £20,308,245 in 2021/22 to £16,271,079 in 2022/23. These movements are detailed below.
12. Opening budget adjustment reduction (£3,028,930) (appendix A.2). This includes the removal of one-off growth items relating to previous years’ budgets.
13.Additions to the base budget:
· inflation, salary increments and other salary adjustments £596,821 (appendix A.3). For all 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 – one-off £298,674 and ongoing £887,227 (appendix A.4), these items comprise additional expenditure items, and reductions in income, which have been identified by officers as 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 the base budget challenge.
14. Deductions from the base budget:
· base budget reductions £2,471,182, (appendix A.5) 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, increases in income, or correction to budgets.
One of the most significant reductions is in respect of the costs of the Local Plan. Local plan costs fluctuate significantly from year to year depending on at what stage the council is in the local plan process. Officers intend to manage this going forward by creating a separate reserve, to which the council will make a fixed annual contribution, to pay for the non-staffing costs of the local plan to manage these fluctuations. It is also proposed that the underspend on these costs at the end of 2021/22 will be added to this reserve.
· increase in managed vacancy factor £219,776. 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 £300,000. 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. The following areas have been identified as initial areas for review:
- Development management,
- Front of house,
- Grounds maintenance.
15. 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).
16. As a result of these changes the council’s revised base budget for 2022/23 is £16,271,079 some £4,037,166 less than that set in 2021/22. This decrease is due to the removal of prior year one off budgets and savings identified during the budget challenge.
Revenue growth
17. Revenue growth of £612,500 has been included in the budget for 2022/23. This is detailed in appendix B.1 and reflects the following.
· The ongoing increase in employer National Insurance costs which commences in 2022/23, government funding for which has now been confirmed to be in the settlement,
· One-off funding, totalling £500,000, to fund activity in support of the following corporate plan priorities:
o Climate action,
o Nature recovery, and
o Community well-being.
· A one-off increase in the budget to fund transformation activities, to be funded from the projected underspend in 2021/22. Transformation activities are discussed later in this report.
Revenue savings
18. Savings proposals relate to an ongoing proposed change in car parking fees has been included in the budget for 2022/23. This is detailed in appendix B.2 and amounts to £105,000.
Borrowing costs
19. The revised capital programme for 2021/22 to 2025/26 agreed by Council in October 2021 was funded in part by external borrowing. Borrowing costs of £101,500, reflecting anticipated interest costs, are included in the budget for 2021/22.
Gross treasury income
20.Treasury income earned in 2022/23 is currently forecast to be £1,776,730 and will be allocated as follows:
· £1,376,730 to support future revenue budgets; and
· £400,000 reinvested in financial instruments.
21.Investment income remains low because of very low interest rates forecast over the medium term. More details of treasury income can be found in the council’s Treasury Management Strategy report[1].
22. Including revenue growth and savings, borrowing costs and treasury income results in a net expenditure budget for the council of £15,103,349.
Reserves and other funding
Transfers from reserves
23.The proposed transfers to earmarked reserves total £545,890 and reflect:
· The transfer from reserves of projected treasury income earned in 2021/22 and earmarked to support the revenue account in 2022/23 - £1,210,000,
· The transfer to reserves of treasury income earned in 2022/23 - £1,777,000,
· The transfer to reserves of the affordable homes element of the New Homes Bonus (NHB) payment - £90,160,
· Other transfers from the revenue grants reserve - £111,270.
24.Based on the above use of reserves and other funding, the amount of revenue expenditure to be financed from government settlement, council tax and unearmarked reserves in 2022/23 is £15,649,239 (appendix A.1).
Funding
Local government settlement
25. Following the Spending Review in November 2021, the provisional local government settlement for 2022/23 was announced in December 2021. As with the previous year’s settlement, this is for one year only.
26. Table 1 below details the government’s funding for the council in 2022/23.
Table 1: provisional local government finance settlement 2022/23
27. The provisional settlement for 2022/23 is over five per cent lower than 2021/22. Whilst the provisional settlement, at a national level, includes an average increase in “core revenue spending power” of 6.8 per cent, council tax income is included in that definition and, in calculating the increase, government assumes that council tax will increase by the maximum allowed before a referendum is required. As shown in the government’s calculations, the council’s core revenue spending power will increase by 1.1 per cent, reflecting an increasing reliance on council tax income whilst government grant funding reduces.
28. Included within the government’s definition of core revenue spending power is NHB, which has become critical to the sustainability of the council’s MTFP. As identified above funding has been provisionally announced along with the settlement this year at £2,003,256 for 2022/23.
29. Outside of core revenue spending power, government has also provided additional one-off services grant funding. This amounts to £179,575 and is in addition to lower tier services grant funding of £116,848.
30. At the time of writing this report the final settlement figures had not been received from the government. It is not anticipated that when this information is available it will be significantly different to the provisional figures.
31. In announcing the settlement, the Secretary of State for Levelling Up, Housing and Communities stated that:
As part of this we will look at options to support local authorities through transitional protection. Councils should note the one-off 2022/23 Services Grant provided in the Local Government Finance Settlement in 2022/23 will be excluded from potential transitional protections.”
32. For budget setting purposes it has been assumed that the council’s “core revenue spending power” will remain constant during the period covered by the MTFP period. It is conceivable that this may be too optimistic an approach, or indeed too pessimistic. Unlike a number of other district councils for whom core revenue spending power had not changed in the last two settlements, this council has seen small increases over that period. Officers therefore consider it prudent to project core revenue spending power being maintained over the MTFP period.
33. The actual funding generated in future years will depend on the outcome of the review of the retained business rates scheme which will include changes to:
· The percentage of business rates growth is retained by the different tiers of local government,
· the baseline in accordance with the fair funding review,
together with the outcome of the review of NHB.
34. Business rates retained by the council as planning authority relating to facilities generating renewable energy within the district is estimated at £76,894 (MTFP row 54).
Collection fund
35. The surplus on the collection fund is estimated in 2022/23 to be £275,396.
Use of reserves
36. The difference between expenditure requirement and the funding available is smoothed over the medium-term financial plan by transfers to and from the general fund balance. The net impact of these budget proposals is a draw on reserves of £2,107,799 in 2022/23. This is considerably lower than the £4.3 million required to balance the revenue budget in 2021/22. Its is also lower than the £3,564,356 that, when the 2021/22 budget was set, was the estimated draw on reserves required for 2022/23.
Cabinet member for finance’s revenue budget proposal
37. Based on the amendments detailed above, and as shown in appendix A.1 of this report, the cabinet member’s budget proposal, including growth, is for a net revenue budget of £15,103,349. This revenue budget as proposed would result in an increase of £5.00 to current band “D” council tax to £136.24.
38. Appendix C shows the breakdown of the revenue budget.
Capital programme 2022/23 to 2026/27
Current capital programme
39. The latest capital programme (before growth) is attached at appendix D.1 and is summarised in table 2 below. It is the capital programme as set by Council in February 2021 plus: -
· slippage (caused by delays to projects) carried forward from 2020/21,
· new schemes approved by Council during 2021/22,
· re-profiling of expenditure on schemes from the 2021/22 financial year to future years where delays to schemes have occurred,
· cabinet approved movement of schemes from the provisional to the approved capital programme,
· the deletion of previously agreed schemes that have completed or are no longer being pursued at this time in their original form.
40. A number of existing schemes have been identified as being available to be funded from the council’s share of Community Infrastructure Levy (CIL). £296,000 has been allocated the following existing schemes in the provisional programme:-
· Abbey Sports Centre Artificial Turf Pitch
· Park Leisure Centre Roof Lights
· Thame Leisure Centre Combined Heat and Power Unit
41. The capital programme also includes CIL receipts that are payable to Oxfordshire County Council and Oxfordshire Clinical Commissioning Group.
Cabinet capital programme proposals
42.Appendix D.2 contains a list of capital schemes that are being recommended for inclusion and amendment in the capital programme. Appendix D.3 contains a further list of proposals that will be funded from CIL and Section 106 receipts. Officers will amend the provisional capital programme to include the proposals if approved by Cabinet and Council.
Financing the capital programme
43. Where permitted, capital expenditure is funded in the first instance from specific government grants, earmarked reserves and other external contributions. The balance of the programme is funded from the council’s capital receipts reserve.
44. Table 2 contains a schedule showing the current and proposed capital programme and how it will be financed, including the growth proposals, if they are approved. The total planned capital expenditure is £73.973 million over five years.
45. The council’s usable capital receipts, based on current estimates, are expected to be £4.26 million by the end of 2026/27. In addition, future asset sales and realisation of capital receipts are anticipated to be generated via implementation of the Strategic Property Review.
Table 2: current and proposed capital programme with financing
Future pressures on the capital programme
46. Table 2 also shows the use of council resources to fund the capital programme. Officers advise Cabinet not to earmark all available resources in proposing the budget to Council, as the prudential code requires local authorities to set sustainable budgets. By retaining unallocated balances, Cabinet can demonstrate that through a combination of this and future income (that can be expected beyond the period of the budget) it can fund future pressures.
47. In terms of future capital spending, Cabinet has indicated that it would like to prioritise spending to support the following corporate plan priorities:
· Climate action,
· Nature recovery,
· Homes and infrastructure.
The prudential code and prudential indicators
48. In setting its revenue and capital budgets for 2022/23, the council must agree prudential indicators in accordance with the prudential code (see below). When recommending its budgets to Council, Cabinet must also recommend the prudential indicators.
49. From 1 April 2004, government control of local authorities’ borrowing was abolished and replaced by a prudential system of self-regulation. Authorities are able to borrow based on need and affordability, which they demonstrate through compliance with the prudential code developed by the Chartered Institute of Public Finance and Accountancy (CIPFA) and given statutory force by government regulation.
50. The key objectives of the prudential code are to ensure that the capital investment plans of the authority are affordable, prudent and sustainable. To demonstrate that authorities have had regard to these objectives, the prudential code sets out a number of indicators that must be considered covering five distinct areas – capital expenditure, affordability, prudence, external debt and treasury management. Council must approve the indicators through the budget process before 1 April each year, but they can be revised during the year if required.
51. The key indicators that will drive the capital budget decision making process will be those concerning long term affordability, as these measure the impact of capital investment decisions on the overall revenue budget and in particular the precept against the collection fund.
52.In setting or revising the prudential indicators the council is required to have regard to:
· affordability e.g. implications for the precept
· prudence and sustainability e.g. implications for external borrowing
· value for money e.g. option appraisal
· stewardship of assets e.g. asset management planning
· service objectives e.g. strategic planning for the council
· Practicality e.g. achievability of the forward plan.
53. Under the code, the head of finance as chief finance officer is responsible for ensuring that the council considers all relevant matters when setting or revising indicators through a report. The head of finance is also required to establish procedures to monitor performance against all forward-looking indicators; and report upon any significant deviations from forward forecasts with proposed actions.
54. Appendix E contains the recommended prudential indicators, which have been calculated based on the budget proposals. The head of finance is satisfied that these indicators show that the council’s capital investment plans are affordable, prudent and sustainable.
The Medium-Term Financial Plan (MTFP)
55. The MTFP provides a forward budget model for the next five years. Appendix F contains the MTFP for 2022/23 to 2026/27. This is a projection of the revenue budget up to 31 March 2027. As identified above it assumes that core revenue spending power will remain unchanged over the MTFP period. It also incorporates assumptions on interest income and other predictable pressures on the council, such as inflation and salary increments.
56. Included within the MTFP is an estimate of costs associated with the 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 at this time to be around £1.5 million, from those receipts.
57. As a result of the work undertaken through the budget challenge process, the future projections represent a significantly improved position as compared to that estimated in previous years. Whilst in all financial years revenue expenditure exceeds revenue income, and there is an increasing draw on reserves to balance the budget, the annual draw on reserves is significantly lower than previously forecast and reflects the budget strategy agreed by Cabinet. Based on these latest estimates, revenue reserves are sufficient to set a balanced budget across the MTFP period to 2026/27 and beyond the end of that period, but not indefinitely.
58. Government have confirmed that details regarding the spending review will be brought forward within the current parliamentary term.
Table 3: use of reserves during MTFP period to balance the revenue budget
59. 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 will need to be reviewed and potentially adjusted in accordance with the level of future government funding.
60.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.
61. Excluding the £50 million investment, the council is projected to hold £18.3 million of general revenue balances and £7.7 million earmarked revenue reserves as at 31 March 2027.
Communities Capital and Revenue Grant Scheme
62. On an annual basis, the council has considered the amount to be made available for the Community Capital Grant Scheme. From 2018/19, some of this funding has been allocated to revenue projects. The council is asked to consider the amount to be made available for the Community Capital and Revenue Scheme and it is recommended that a grants budget of £500,000 be set for 2022/23 comprising:
· £180,000 for individual councillor grants,
· £320,000 for the communities’ capital grants scheme.
Any underspend on the individual councillor grants will be available to fund additional spend on the communities’ capital grants scheme.
The robustness of the estimates and the adequacy of reserves
63. The Local Government Act 2003 places a duty on the chief finance officer (i.e. the head of finance) to report on the robustness of the estimates and the adequacy of reserves. The council must have regard to this report when making decisions about the setting of the budget.
64. The construction of the budget has been managed by qualified accountants and as identified above, has this year been subject to significant challenge both by strategic management team and cabinet members.
65. An informal cabinet update on December 17 2021 noted an interim report on progress with on budget setting. A detailed informal briefing on this budget proposal was given to the council’s scrutiny committee members on 7 February 2022. This session was open to all councillors.
66. In view of the process undertaken and his own knowledge of the budget, the head of finance is satisfied that the budget for 2022/23 is both prudent and robust. However, as demonstrated above and based on current assumptions, revenue expenditure exceeds revenue income in all years of the MTFP. Whilst the council’s revenue reserves are sufficient to cover that gap over the MTFP period and beyond, the ongoing budget gap, whilst much reduced, still needs to be addressed. The Head of Finance is satisfied, based on their knowledge of the current work to deliver the long term transformation programme, that there is strong member and officer commitment to achieve this.
67. The transformation activity, which was first agreed in the 2020/21 budget and forms part of the corporate plan delivery activity, is central to the council’s efforts to tackle the ongoing budget gap. This work, whilst progressing, has been impacted by the pandemic. However, officers are now working on defining more closely the scope and remit of this work, which is anticipated progress at pace in 2022/23 and will benefit from the additional £250,000 being proposed in this budget and funded from the projected 2021/22 underspend.
68. It is anticipated that a dedicated team of officers, supported by external consultants as appropriate, will drive and programme manage the delivery of the transformation work, which will be focussed initially on the following areas that have been identified in discussions between officers and cabinet members:
· Implementation of the IT strategy,
· Customer services including front of house,
· Strategic property review and implementation of the corporate landlord model,
· Development management,
· Grounds maintenance.
69. Further details on this work will be presented to cabinet as they progress in accordance with the council’s democratic process.
70. The head of finance’s full report will be available at full Council.
Climate and ecological impact implications
71. Agreement of the revenue budget for 2022/23 and capital programme to 2026/27 agrees the allocation of funding to support the council’s corporate objectives, including the objectives of Protect and Restore our Natural World and Action on the Climate Emergency, for which revenue growth has been included.
Legal Implications
72. 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).
73. The requirement placed on the council by the Local Government Act 2003 to set prudential indicators and for the chief finance officer to make a report to the authority on the robustness of the estimates and the adequacy of reserves are addressed within the body of this report.
Other Implications
74. Agreement of the revenue and capital budgets authorises expenditure in accordance with the council’s delegated powers and financial procedure rules. The officer, councillor or councillor body taking those decisions will take into account the human resources, sustainability and equality and diversity implications of individual spending decisions.
Conclusion
75. This report provides details of the revenue base budget for 2022/23, the capital programme 2022/23 to 2026/27, government grants (the settlement), uncommitted reserves and balances, the cabinet member for finance’s budget proposals and the resulting prudential indicators.
76. In light of the information provided Cabinet must make a number of recommendations to Council regarding the revenue budget, the capital programme and the prudential indicators.
Appendices
Appendix A.1 Revenue budget 2022/23
Appendix A.2 Opening budget adjustments
Appendix A.3 Inflation, salary increments and other salary adjustments
Appendix A.4 Essential growth
Appendix A.5 Base budget savings
Appendix A.6 Revenue contingency
Appendix B Budgeted corporate plan activity
Appendix C Service budget analysis
Appendix F Medium term financial plan