1. Section 25 of the Local Government Act 2003 places a duty on the chief finance officer (at this council the head of finance) to make a report to the council on the robustness of the estimates and the adequacy of the reserves. This report fulfils this requirement and provides councillors with assurance that the budgets have been compiled appropriately and that the level of reserves is adequate. It is a statutory requirement that councillors must consider this report when considering and approving a budget.
2. In presenting this report the head of finance is mindful of other associated statutory safeguards designed to prevent the authority from over-committing itself financially, namely:
· Section 151 of the Local Government Act 1972 which requires the authority to make arrangements for the proper administration of its financial affairs and that the head of finance as chief finance officer has personal responsibility for such administration;
· Section 32, 43 & 93 of the Local Government Finance Act 1992 which requires the authority to set a balanced budget;
· The Prudential Code introduced as part of the Local Government Act 2003 sets out the framework within which the authority must manage its investments, including adequate planning and budget estimates;
· The external auditor’s duty to assess the adequacy of the authority’s proper arrangements to secure economy, efficiency and effectiveness (‘value for money’).
3. To reinforce these obligations, section 114 of the Local Government Finance Act 1988 requires the head of finance as chief finance officer to report to all the authority’s councillors, in consultation with the monitoring officer and chief executive, if there is or is likely to be unlawful expenditure or an unbalanced budget.
PREPARATION, REVIEW & SCRUTINY
4. In accordance with best practice and using accruals accounting, the council provides for realistic estimates of costs and known liabilities.
5. The initial base budget estimates were prepared jointly by the heads of service and appropriately qualified staff from the council’s finance team. A thorough base budget challenge exercise, led by the head of finance and the interim head of policy and programmes, reviewed and challenged these budgets. This exercise realised significant recurring budget savings. The resulting base budgets were also reviewed by the relevant portfolio holder together with the finance portfolio holder and the leader of the council.
6. The 2022/23 budget briefing session presented to the members on 7 February 2022 provided a detailed explanation of the factors taken into account in determining the base budgets.
REVENUE BUDGET
7. Similar to most district councils the most significant costs within the revenue budget are:
· staff salaries and related costs
· payments under contracts for services
· housing benefit and council tax support payments.
8. The estimates of staff costs are prepared by calculating the cost of employing each member of staff for the full year. The budget also makes provision for recruitment and training costs. Staff costs include incremental progression and an allowance for the cost of any locally agreed pay award. From 2022/23, the employee salary budgets make allowance for the increase in National Insurance costs which comes into effect in April 2022.
9. Under normal circumstances, the risk of overspending on staff costs is considered negligible. The risk of under-spending on staff costs is high, so the budget assumes a level of expected vacancy savings and this year, the council has budgeted at 95 per cent of the expected salary level in its services, which is a change from the 96 per cent previously used.
10. The costs of the most significant council contracts are linked to increases in the various price indices, usually the Retail Prices Index (RPI) or the Consumer Price Index (CPI). Allowance has been made in the budget for cost inflation but it is possible that such allowance may be insufficient given the current high rates of inflation. If this is the case then the contingency budget may need to be called upon. Allowance has also been made within the budget for additional costs arising from demographic growth and increased demand for services (e.g. additional properties leading to increased waste collection costs).
11. The risk of overspending on contract costs exists and there remains a financial risk from a contractor failing to deliver services in accordance with the contract. Such risks are managed through the council’s contract monitoring and risk management procedures but cannot be eliminated.
12. The cost of housing benefit is largely met through government subsidy. However, because of the large sums involved, there is a significant financial risk to the council of fluctuations in subsidy income and income from housing benefit overpayments. This risk is outside the council’s control. The level of local authority errors in the latest grant subsidy claim is safely below the government’s threshold. The risk of any cost falling on the council is therefore low and continues to be mitigated by close contract management.
13. The areas of expenditure where there is a greater level of risk are within the demand led budgets such as the costs of homelessness (including temporary accommodation). Experience of demand in the current and recent years has been used to inform the 2022/23 budget.
14. A number of revenue income streams are sensitive to changes in market conditions, including planning fees, building control fees, and land charges fees which all respond directly to the fluctuating characteristics of the housing market. Car parking income can also be volatile and responds to the general economy and retail market. In setting the budget, adjustments have been made to reflect anticipated prevailing market conditions but there will always be a risk that budget targets are not met.
INVESTMENT INCOME
15. The returns on the council investment portfolio are relied upon to support the cost of services. The continuing impact of low interest rates has been factored in to the MTFP reported as part of the budget setting report.
16. Investments are diversified in accordance with the treasury management strategy, and the earnings assumptions in the budget are set prudently. Investment income is not committed until the year after it is earned. There is therefore certainty about the amount available when the budgets are set.
REVENUE CONTINGENCY SUM
17. The council has for some years now included a revenue contingency sum of £200,000. As noted above, as a high value of savings have been identified as part of budget setting, this means that budgets that could have withstood in year service pressures have been reduced or removed. In addition, inflation rates are currently high. In mitigation to these points, officers feel it appropriate to increase the contingency budget by £200,000 to £400,000 on an ongoing basis.
FUNDING FROM CENTRAL GOVERNMENT
18. On 16 December 2021 the government announced the provisional 2022/23 local government settlement, with the final settlement confirmed on 7 February 2022.
19. When calculating councils’ spending power the Government assumes councils increase their council tax to the maximum level allowable before a referendum would need to take place.
20. The 2022/23 settlement is a one-year settlement only. Future government funding remains uncertain due to delays in progressing:
· The fair funding review
· the review of the business rates retention scheme
· the review of New Homes Bonus
21. Government grant funding has been projected to gradually decline over the medium-term financial plan period. The projections could be too optimistic or too pessimistic. If they are too pessimistic then the council’s reserves are considered adequate to compensate until corrective action by the council can be undertaken.
CAPITAL PROGRAMME
22. The council’s project management system is used to manage capital schemes. This is designed to reduce the risks of both underspends and slippage in the programme.
23. The capital programme is split into an approved programme and a provisional programme. This split is made to give greater certainty of costs and timescales before a final commitment is made. This requires a detailed appraisal to be agreed by the relevant cabinet member before expenditure is committed.
24. For major projects the council engages skilled advisors to assist it. Whilst these measures can manage and mitigate risks, by their nature some capital schemes will still contain significant financial risks.
25. In the capital programme recommended to the cabinet, allowance has been made for works considered necessary to the council’s land and property assets.
26. The council has sufficient capital contingency and reserves to meet any potential capital overspends. While the use of these reserves would reduce the interest income earned, the impact would not be significant. The investment income is not committed until it has been earned.
MEDIUM TERM FINANCIAL PLAN
27. An updated MTFP has been included in the budget report. The plan sets out provisional revenue spending plans and the estimated use of reserves through to 2026/27. Based on prudent estimates of future government funding the council should be able to set a balanced budget throughout the duration of the MTFP period and beyond the end of that period, but not indefinitely.
28. 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.
29. 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 increasing budget gap. This work, whilst progressing, has been impacted by the Coronavirus pandemic. However, officers are now working on defining more closely the scope and remit of this work, which is anticipated will 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.
PRUDENTIAL INDICATORS
30. The prudential code requires the calculation of a number of prudential indicators, which measure the sustainability of the council’s MTFP, explicitly with regard to affordability, prudence, value for money, stewardship, service objectives and practicality. This is backed up by a specific requirement to monitor performance against forward-looking indicators and report and act on significant deviations.
BUDGET MONITORING
31. At the end of May, August and November heads of service complete budget monitoring returns forecasting their year-end positions which are reported to Cabinet.
RISK MANAGEMENT & INSURANCE
32. The risk management arrangements are managed by the council’s programmes and assurance team.
33. The main risks inherent in the council’s MTFP are:
· government grant funding is less than estimated,
· ongoing economic uncertainty,
· Unforeseen growth in essential expenditure.
34. The Chartered Institute of Public Finance and Accountancy (CIPFA) has issued guidance on local authority reserves and balances in Local Authority Accounting Panel (LAAP) bulletin 55. It sets out the three main purposes for which reserves can be held:
· A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing – which forms part of general reserves;
· A contingency to cushion the impact of unexpected events or emergencies – also part of general reserves;
· A means of building up funds often referred to as earmarked reserves, to meet known or predicted liabilities.
36. Whilst the treasury investments are capable of being realised, investment in capital schemes is not capable of being realised. By the end of the MTFP period it is projected that at least £30 million of the £35 million permitted to be invested in capital schemes will have been invested or earmarked for investment.
37. Excluding the £50 million investment, the council is projected to hold £18.4 million of general revenue balances £7.7 million earmarked revenue reserves, and £4.3 million of capital receipts as at 31 March 2027.
38. The budget estimates have been prepared following a properly controlled and professionally supported process. They have been subject to challenge and due consideration, and the identifiable risks should be capable of management.
39. Overall, the level of reserves is adequate in relation to the proposed revenue budget and capital programme for 2022/23 and beyond the medium-term period to 2026/27, but not indefinitely. However, the council’s MTFP shows that it increasingly draws more from its reserves to support a revenue budget that is already in deficit. The scale of the challenge of ensuring that reserves continue to be adequate will be determined in large part by how generous or not the government’s future funding schemes prove to be for the council.
Simon Hewings (Head of finance and chief finance officer)
10 February 2022