FOR GENERAL RELEASE
1.
PURPOSE OF REPORT AND POLICY CONTEXT:
1.1
This report provides an update on the General Fund financial
position following the report to July Policy & Resources
Committee which highlighted the potential scale of the deficit this
year and potential budget shortfalls that need addressing in
2021/22 and beyond.
1.2
As reported to the committee over recent months, the pandemic has
had, and continues to have, a severe impact on the council’s
finances through additional costs, losses of fees & charges,
and reductions in tax revenues. However, there is evidence of
economic and visitor number recovery, although not across all
sectors, and this has helped to improve income forecasts in some
areas while emergency expenditure is also reducing in many areas.
The Targeted Budget Management Month 5 (August) report, also on
this committee agenda, provides full details of changes in
expenditure and income forecasts.
1.3
This separate report considers the key question of whether the
council should consider taking Emergency Budget measures or,
alternatively, use one-off reserves to mitigate any in-year
deficit, the latter requiring replenishment of reserves over future
years.
2.
RECOMMENDATIONS:
That the Policy & Resources Committee:
2.1
Notes the updated ‘Moderate View’ forecast as at Month
5 (August) which indicates a deficit of £19.671m consisting
of an overspend on services of £7.853m and a Collection Fund
deficit of £11.818m.
2.2
Approves the use of the ‘Financial Smoothing’ mechanism
set out in paragraph 3.14 to manage Covid-related budget deficits
both for the current year and for 2021/22 assuming a maximum of
£20m for financial planning purposes and, if agreed, notes:
-
(i) that the
expected use of reserves to mitigate any deficit will be updated
for the month 9 (December) forecast and recommended and approved by
Policy & Resources Committee and Budget Council respectively in
February 2021, and;
(ii) that the actual
use of reserves to mitigate any deficit will not be finally
determined until the 2020/21 accounts are closed and the outturn
position reported to Policy & Resources Committee for approval
in July 2021.
2.3
Agrees to the continued pause of new capital schemes as set out in
paragraph 3.25 and that paused schemes will be subject to further
review at the December Policy & Resources Committee
meeting.
3.
CONTEXT/ BACKGROUND INFORMATION
Financial Impact of the Covid-19 Pandemic
3.1
During the initial crisis period and lockdown, the pandemic
significantly increased social care, homelessness, public health,
PPE, coroner and other related emergency response costs but also
resulted in a severe economic slowdown. The latter impacted many
sectors that are heavily reliant on visitors to the city. This in
turn resulted in an impact on the council’s finances due to
significant impacts on sales, fees & charges income,
particularly museum and event venue incomes, as well as parking
charges and penalty notices.
3.2
Similarly, taxation revenues have been affected primarily due to
the impact on businesses and jobs and therefore more people needing
financial support, such as Council Tax Reduction. There has also
been a slow-down in housing developments, impacting on the tax
base, and it is expected that Council Tax collection rates will be
impacted, particularly in relation to older debts. There are
similar impacts in relation to Business Rate growth assumptions and
collection rates.
3.3
The council has only been able to offset these impacts to a limited
extent because it is expected to continue to support its suppliers
and service providers in line with the Cabinet Office Supplier
Relief Policy Note and, as a public authority, it is not expected
to make significant use of the government’s Employment
Support scheme (furlough). The majority of its statutory services
must also continue to be provided alongside a wide range of other
essential services such as refuse and recycling collections.
3.4
In response, the government provided Emergency Response grant
funding in 3 tranches which, for this council, amounted to
£18.762m of which £0.300m was used at the end of the
last financial year. Following significant lobbying across the
sector, the government also recognised the scale of losses on
Sales, Fees & Charges income and in early July announced a new
compensation grant that would provide for 75% of losses after
removal of a 5% deductible. This grant is currently estimated to be
worth £14.966m to the council and is included in the TBM
Month 5 forecast reported elsewhere on this committee agenda.
3.5
In the report to July Policy & Resources Committee, the level
of government grant funding assumed for planning purposes was
£25.905m. The current position, including all announcements,
is that government grant funding is expected to be £33.428m,
an improvement of £7.523m on the assumed level.
Current Year Financial
Position 2020/21
·
The timelines for easing distancing measures and the continuing
impact of any measures on businesses, visitor attractions, events
and other activities;
·
The potential for a second wave or local outbreak to impact
negatively on these timelines;
·
Potential further government funding support for local
authorities;
·
Potential further funding for Adult Social Care hospital discharges
via the Clinical Commissioning Group (i.e. further NHS
funding);
·
The general macro-economic impact and how this translates locally
into the impact on individuals and businesses over time and the
resulting impact on local taxation revenues; and
·
The potential for further cost savings for the council through
furlough and across other budget headings such as contracts and
supplies & services.
3.8
Using the TBM Month 5 (August) information reported elsewhere and
updating for the latest estimates of government grant support, the
following table compares the ‘Moderate View’ position
as at July with the latest forecast.
Table: Updated Moderate View
Forecast 2020/21
|
|
Moderate View
Forecast
(July P&R)
|
TBM
Month 5
(August)
Forecast
|
Difference
Better (-)
Worse (+)
|
|
Base position: TBM
Forecast Month 2 (May)
|
36.003
|
36.003
|
|
|
Improvement due to
speed of recovery (Income)
|
-5.000
|
-4.081
|
+0.919
|
|
Further Mitigations
(i.e. cost improvements)
|
-3.000
|
-6.054
|
-3.054
|
|
Continued Capital
Programme pause
|
-0.500
|
-0.492
|
+0.008
|
|
Further government
COVID-19 funding
|
-10.000
|
-17.523
|
-7.523
|
|
Revised Outturn Overspend 2020/21
|
17.503
|
7.853
|
-9.650
|
|
Forecast Collection
Fund Deficit 2020/21
|
10.000
|
11.818
|
+1.818
|
|
Total Projected Deficit 2020/21
|
27.503
|
19.671
|
-7.832
|
3.9
All things taken into consideration, by comparison to the Moderate
View estimate reported to the July committee meeting, the current
position is £7.832m better with a projected deficit in
2020/21 of £19.671m. Although this is clearly a significant
move in the right direction, without very significant improvements
in taxation revenues and/or additional government grant funding,
there clearly remains a very substantial projected deficit for
2020/21. Note also that further improvements in income from here on
in will now have less impact because for every £1.00
improvement, the council will lose £0.75p in compensation
grant.
3.10
It should be noted that the Collection Fund deficit relates to the
net effect of reduced Council Tax and retained Business Rate
revenues caused by increased Council Tax Reduction (CTR) claims,
reduced collection rates, and lower than anticipated business and
housing growth. The current estimated deficit is £11.818m but
could still improve if the current increase in CTR claims proves to
be a short-term spike and collection rates recover later in the
year. A key factor is the government’s continuing support for
the furlough scheme, which has now been extended for 6 months
through a new jobs support scheme, although the government funding
will be at a rate of one-third of wages rather than the 60% level
in the final month of the current scheme. The new jobs support
scheme requires people to work at least one third of their normal
hours.
Managing the 2020/21 Forecast Deficit
3.11
The report to July Policy & Resources Committee advised that
without very substantial additional government funding or a sharp
‘V-shaped’ economic recovery, the council would need to
consider two options for managing the position in 2020/21. These
were:
(i) An
Emergency Budget Option: This option would be taken if a
more prudential approach were considered necessary and could
include approval for emergency reductions to non-statutory
expenditure and services alongside all other available mitigation
measures such as vacancy management and other spending controls.
This option could still include some use of reserves or balances
with a plan for their replenishment over future years; and
(ii) A Financial
Smoothing Option: This option might be favoured if a more
optimistic view were taken alongside utilising all available
mitigations and financial recovery actions to manage the projected
deficit down as far as practicable and safe. Any remaining deficit
would then be covered by utilising reserves and balances which
would need a plan for replenishment over future years. It is called
‘financial smoothing’ because it effectively buys time
to manage the financial impact over a period of years.
(i) The scale
of the projected deficit relative to the available reserves and
balances the council would need to apply to the situation. As
previously reported, the council has approximately £50m
reserves and balances but is required to maintain significant risk
reserves and balances to meet normal insurance, legal, financial
and contractual risks. In addition, all earmarked reserves are held
to meet future contractual commitments, regeneration scheme costs
or other identified liabilities and therefore not all reserves are
immediately available to use. Using reserves to meet a deficit
exceeding, for example, £30m to £40m would therefore
present a very serious risk to the financial sustainability and
stability of the council and an Emergency Budget would be more
appropriate in this scenario.
(ii) The expected
trajectory of the pandemic. A clearly worsening situation resulting
in a sustained local lockdown and consequent sustained impact on
the local economy, visitor numbers and therefore council finances,
would indicate that a more determined and sustainable response may
be required rather than the short term use of reserves.
(iii)
Consideration of the impact of an Emergency Budget including the
impact of the reduction, suspension or cessation of council
services on residents, service users and staff, and on the economy
through reduced spending either on in-house services or on
contracted services. Withdrawal of spending and services would be
likely to impact adversely both on residents and on local economic
recovery.
3.13
As the projected deficit has reduced to £19.671m,
representing 39% of total reserves, and there are reasonable
prospects for a slow but steady recovery of the economy and visitor
numbers, particularly with the announcement of the extension of the
employment support scheme for 6 months, the use of Financial
Smoothing is the recommended approach at this time. The advantages
of Financial Smoothing are that:
·
It provides the council with time to review its medium term
financial plan and to plan for any service changes in a considered
and organised way, thereby minimising immediate impacts on
services and residents;
·
It avoids the council impacting further on local economic recovery
by withdrawing public spending at a critical time; and
·
It avoids diverting officer capacity to managing, consulting on and
implementing reduction, suspension or cessation of services at a
time when resources are best focused on responding to the pandemic
and planning for and aiding recovery.
·
The council’s Working Balance is an annually assessed risk
reserve held to meet legal and financial risks including appeals,
challenges or contractual disputes, as well as potential billing
failures, civil contingencies and other emergencies. It is
currently £9.000m, which is approximately 4% of the General
Fund and represents around 3 weeks’ council tax income. As it
is a key component of demonstrating the council’s sustainable
financial management and financial resilience, it should be
protected and should not be utilised for financial smoothing.
·
The council has other risk reserves such as the Insurance Fund
which covers insurance risks for which the council cannot readily
obtain policies or to cover agreed excesses and deductibles as part
of achieving better value for money premiums. Such reserves could
be called on at any time and therefore the council should take this
into account when considering the timeframe for replenishing these
reserves.
·
Other reserves can be ‘borrowed from’ provided there is
a plan for their replenishment over a reasonable timeframe and
before they are due to be called upon.
Exactly which
reserves are utilised can be kept under review as part of the
council’s normal bi-annual review of reserves which includes
the annual budget setting process (February) and the annual closure
of accounts process (June/July).
3.15
For the purposes of the Medium Term Financial Strategy, which will
need to reflect replenishment (repayment) of reserves, a 10-year
timeframe will initially be adopted for planning purposes. However,
if the use of reserves is ultimately lower than estimated, for
example, £10 million or less, a shorter timeframe should be
considered by full Council when setting the budget. Repayments are
not recommended to start until 2022/23 to relieve pressure on the
2021/22 budget where ongoing financial effects of the pandemic are
still likely to be evident.
3.16
Decisions on which reserves will be used to support financial
smoothing are not required now. The final allocation of reserves
will be made by Budget Council in February 2021 and will be
revisited by Policy & Resources Committee when the 2020/21
outturn position is finalised in July 2021.
3.17
The government announced that council tax and business rates
collection fund deficits from the current financial year can be
spread over three years rather than just one. As this accounts for
£11.818m of the £19.671m this could significantly
reduce the draw on reserves need to fund all this deficit from
reserves in the short term.
3.18
The government has also indicated that some funding for collection
fund losses will be announced in the next Comprehensive Spending
Review (CSR), in which the government will agree an apportionment
of irrecoverable council tax and business rates losses between
central and local government for 2020/21. No assumptions of funding
through this route have been included in projections.
3.20
The government has recently announced that it will not present an
Autumn Budget stating that it is not the time to outline longer
term plans. The government had previously indicated it would be
producing a 3 year Spending Review this autumn however it is now
very likely there will be a one-year only Spending Review and the
timing of this is not clear. This doesn’t make the situation
any easier for local authorities in terms of financial planning and
leaves a significant number of variables and unknowns to
manage.
3.21
At this stage the Medium Term Financial Strategy assumes an
additional £11m grant funding in 2021/22 for Adult Social
Care and ongoing impacts of the pandemic. This is considered a
reasonable assumption in light of the impacts on local authority
budgets that government will be fully cognisant of through the
monthly MHCLG Financial Data Return collection process. However, it
should be noted that the budget gap of £17.3m in 2021/22 also
assumes that the council’s income from Sales, Fees &
Charges will recover to normal (budgeted) levels. This is a
significant assumption and would be likely to require that
virtually all social distancing measures have been removed to be
achievable. If this is not the case, further financial impacts are
likely unless the government continues to compensate local
authorities accordingly.
3.22
The main options or possibilities for closing any projected budget
gaps are as follows:
(i) Government
may provide increased funding (compared to the level assumed)
through the Local Government Financial Settlement. Potential grant
funding for Adult Social Care and COVID-19 is discussed above;
(ii) Government may
allow council’s to levy additional Council Tax increases
through precepting to provide additional funding for a specific
area, e.g. Adult Social Care. Similarly, government may relax the
current ‘excessive Council Tax increase threshold’,
thereby allowing higher increases. Both would be optional and
subject to full Council approval.
(iii)
The council could elect to increase Council Tax above the current
‘excessive council tax increase threshold’ (i.e.
currently 1.99%). This would require a local referendum to be held
with a successful outcome. Holding a referendum would cost
approximately £0.370m and doing so also requires
identification of one-off resources to mitigate the delay in
implementing proposals while the outcome is awaited. It is also a
legal requirement to have a substitute budget should a referendum
not be successful;
(iv)
Partners could provide increased funding for joint operations e.g.
CCG funding toward social care costs. However, the CCG has reduced
its funding support in previous years because it is also under
increasing financial pressure. Other partners are small by
comparison;
(v) There may be
improvements in the projected level of cost, income and/or demand
pressures to be prioritised in the current estimates;
(vi)
The council can identify a programme of savings measures to either
reduce costs in non-priority areas, manage down demand pressures
(e.g. through prevention and commissioning strategies), generate
greater incomes or attract alternative funding.
Options (i) to (v) above carry a high
level of uncertainty and therefore the authority will normally need
to develop savings proposals and options as described in (vi)
above.
3.23
The council’s Executive Leadership Team are currently
developing budget and savings proposals to address the predicted
budget gap in 2021/22 and these will submitted to Policy &
Resources Committee in draft form in December 2020 as normal.
3.24
The council is also exploring working with the Local Government
Association (LGA) who are currently focusing their support for
councils on addressing Covid-19 and its consequences. The
LGA’s Recovery and Renewal programme aims to utilise their
experience and knowledge of the sector to provide the authority
with assurance and constructive challenge regarding the development
of its recovery and renewal, and budget proposals in this context.
This will include providing awareness of what other authorities
have considered and successfully implemented, using their network
of contacts and information channels.
Pausing of Capital
Programmes
3.25
At the 30 April 2020 Policy & Resources Committee, the
committee agreed to pause a number of new capital schemes
backed by capital receipts and/or borrowing, including schemes
where the borrowing is to be funded from future income generation.
Capital Schemes with a total value of £26.216m were put on
pause pending a review of the council’s financial situation
resulting from the pandemic. The schemes were paused until July
when they were reviewed again and it was agreed to un-pause a small
number of schemes but continue to pause schemes with a value of
£24.683m until further review at the October Policy &
Resources Committee. The schemes recommended for continued pause
were primarily those where financing costs were predicated on
planned growth in overall income or rental budgets, which has not
yet materialised.
3.26
As can be seen from the information earlier in this report and from
the TBM Month 5 monitoring report, the financial situation is
improving but there remains a very substantial deficit that will
require the unplanned use of reserves. A continued pause of new
schemes funded from borrowing is therefore recommended due to the
additional revenue burden, estimated at £0.492m, that these
would place on an already challenging situation. Pausing continues
to be focused only on those schemes where loan repayments are
funded by income generation that is now suppressed due to the
pandemic.
Table:
Capital Schemes Recommended for Continued Pause
|
Scheme
Description
|
2020/21
Borrowing
£000
|
October
Review
Recommendation
|
|
City Development
& Regen
|
|
|
|
Sustainability & Carbon Reduction
Investment Fund
|
500
|
Continue pause
|
|
Sustainability & Carbon Reduction
Investment Fund - Transport BUDGET AMENDMENT
|
3,900
|
Continue pause
|
|
Culture
|
|
|
|
Purchase of Commercial Properties to support
Madeira Terraces Investment - BUDGET AMENDMENT
|
20,000
|
Continue pause
|
|
Economy Environment
& Culture Total
|
24,400
|
|
4.
ANALYSIS & CONSIDERATION OF ANY ALTERNATIVE OPTIONS
4.1
Two primary options for addressing the 2020/21 projected deficit
are considered in this report. Both are viable but a preference for
one over the other will take into account the factors set out in
paragraph 3.12. At this stage, Financial Smoothing through the use
of reserves is the recommended option as the current deficit is at
a level that would not, in the view of the Chief Finance Officer,
destabilise the council’s finances or leave it in an
unsustainable financial position, carrying unduly high financial
risks.
5.
COMMUNITY ENGAGEMENT AND CONSULTATION
5.1
No specific consultation has been undertaken in relation to this
report.
6.
CONCLUSION
6.1
In conclusion, at this stage of the year, the combined impact of
the forecast in-year overspend and estimated 2020/21 Collection
Fund deficit is an overall deficit of £19.671m. In the
context of the council’s overall reserves and balances, this
level of deficit can be managed by borrowing from reserves and then
agreeing a plan to replenish them over a period of years to attempt
to minimise the immediate impact on services. However, it must be
noted that this will have a number of negative consequences for the
authority including:
·
The need to make provision for repayment of reserves in future
years which could impact on service provision or delivery of
corporate priorities such as carbon reduction initiatives;
·
An increased level of financial risk as any significant depletion
of reserves reduces the council’s financial resilience
against other potential financial risks or shocks; and
·
A potential impact on the council’s ability to support longer
term financial recovery because, for example, a number of reserves
are held in lieu of major regeneration schemes.
7.
FINANCIAL & OTHER IMPLICATIONS:
Financial
Implications:
7.1
These are contained in the body and appendices of the report.
Finance Officer Consulted: James
Hengeveld
Date: 25/09/20
Legal
Implications:
7.2
The process of formulating a plan or strategy for the
council’s revenue and capital budgets is part of the remit of
the Policy & Resources Committee. The recommendations at
paragraph 2 above are therefore proper to be considered and, if
appropriate, approved by it.
7.3
This report complies with the council’s process for
developing the budget framework, in accordance with Part 7.2 of the
Constitution.
Lawyer Consulted: Elizabeth
Culbert
Date: 28/09/20
Equalities
Implications:
7.4
For any significant budget changes, either in the current year or
for 2021/22, it is proposed to continue the screening process
undertaken in previous years and continue to improve the quality
and consistency of Equality Impact Assessments (EIAs). Wherever
possible, key stakeholders and groups will be engaged in developing
EIAs but we will also need to consider how Members and Partners can
be kept informed of EIA development and the screening process. In
addition, where possible and proportionate to the decision being
taken, there may be a need to assess the cumulative impact of the
council’s decision-making on individuals and groups affected
in the light of funding pressures across the public and/or third
sectors. The process will ensure that consideration is given to the
economic impact of proposals.
Sustainability
Implications
7.5
The council’s revenue and capital budgets will be developed
with sustainability as a key consideration to ensure that, wherever
possible, proposals can contribute to reducing environmental
impacts and a low carbon economy.
Risk and
Opportunity Management Implications:
7.6
There are a range of risks relating to the council’s short
and medium term budget strategy including the impact of the
pandemic, ongoing economic conditions, changes in the national
budget, pressures on existing budgets, further reductions in
grants, legislative changes or demands for new spending. The budget
process will normally include recognition of these risks and
consider options for their mitigation. In the current unprecedented
situation, the level of risk that the council may be prepared to
carry and accept is likely to be higher than in normal
circumstances. A full assessment of forecast risks and delivery
risks associated with implementing budget proposals will be
provided as part of the budget setting process and reports to
members.
SUPPORTING DOCUMENTATION
Appendices:
None
Documents in Members’ Rooms
None
Background Documents
None