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Part 2 - Medium Term Financial Strategy (MTFS)

Balancing scales

Background to the Medium Term Financial Strategy (MTFS)

The Council's Financial Strategy provides the strategic framework and corporate financial policy document for managing the Council's finances over the medium term and ensuring sound governance and compliance with best practices.

The MTFS updates Members on the key financial assumptions for the current year budget position (2021/22) and projections for the years 2022/23 to 2025/26 and identifies the key financial risks for the Council.

You can download a full copy of the Icon for pdf Achieving Preston's Priorities (APP) 2022/23 [2.5MB] document here.

The purpose of the Medium Term Financial Strategy (MTFS)

The purpose of the MTFS is to:

(i)  Deliver a budget which is robust
(ii) Ensure long term financial sustainability
(iii) Enable the Council to deliver the Council's priorities including City Centre regeneration, continuing with the work on the Fairness agenda and delivering the Council's essential services to the best it can within the resources available.

The key influences in formulating the update to the financial strategy are:

The key influences in formulating the update to the financial strategy

The Council reviews all key financial assumptions on an ongoing basis and identifies whether there are any material changes which need to be incorporated. These may include changes in assumptions made, either as a direct result of changes in external factors, economic climate, legislation or decisions made locally.

This report updates Council on the key financial assumptions for the current year budget position (2021/22) and projections for the years 2022/23 to 2025/26. All major changes to forecast assumptions and implications for the financial forecast are included within the appendices to this report.

Set out in the MTFS are the general fund revenue forecast, Capital Strategy, five year Capital Programmes, and Treasury Management Strategy including prudential indicators, Investment Strategy and Minimum Revenue Provision Statement. It builds on the platform of the previous strategy. The longer term view of the Council's financial position enables the Council to effectively forward plan.

The Council reviews its finances over a longer term period for major development plans, the vehicle replacement programme, the core and major asset maintenance plan, long term borrowing decisions and individual business case decisions.

The financial strategy is supported by a number of monitoring procedures to ensure the basis for formulating estimates are up to date and reflect all current factors such as changes in levels of fees and charges, increases in costs etc.

The monitoring procedures which support the MTFS and forecast

  • Embedded monthly budget monitoring
  • Review of the Council's earmarked Reserves and balances
  • Quarterly performance reports to Cabinet Member Resources and Performance
  • Capital Project Managers Performance Monitoring and Updates
  • Treasury Management specialist external advice and meetings
  • Reporting of the annual outturn position to Cabinet

The Council is implementing improvements to Performance Management.

COVID-19

The global pandemic has continued to have a significant impact on the financial strategy.

The original estimates reported at the February 2021 Budget Council meeting have been updated to reflect the ongoing financial pressure/costs of Covid 19 and the government funding.

Throughout the pandemic the Council has been working with key partners and has been supporting communities and businesses.

The Council has received various forms of grant funding and has helped businesses through the payment of business grants; paid individuals test and trace support payments and distributed funding to communities. During 2021/22 the Council has continued to receive additional funding to ease the financial pressures which have arisen during, and for delivering the community response to, the pandemic:-

  • From DLUHC, we have received £992k of additional revenue grant funding,  and £142k of income compensation funding to cover our general costs of delivering the pandemic response and to cover the loss of income we have incurred. An additional £185k has been received to improve vaccine take up in the city through the Community Vaccine Champion Fund and £50k was received to ensure the May 2021 elections were delivered in a Covid safe manner.
  • From the Department for Health and Social Care, we have received an additional £256k to enable us to deliver our public health response in areas such as the Track and Trace service, providing Covid testing centres, support for the most vulnerable in the community, assistance for those in self-isolation and for environmental health compliance and enforcement to ensure the public are protected.
  • We have also received a further £366k from DLUHC to enable us to continue delivering the government's Business Grant schemes ensuring over £11m of grants are distributed to local businesses and granting over £17m of mandatory and discretionary Business Rates Reliefs.
  • We have also worked with Lancashire County Council to make £420k of funding available to households suffering hardship as a result of the pandemic and have continued to pay out Self Isolation Grants totalling over £800k.

The Covid-19 pandemic has provided an opportunity for the Council to review the way in which it works and how it uses its buildings.

A team has been set up to review hybrid working planning for staff to ensure a safe flexible return to the offices. This may involve the purchase of equipment such as screens or changing the office layout.

The Local Government Finance Settlement 2022 / 23 and update on future Government Funding

On 7 February 2022, the Government published the Local Government Finance Settlement for 2022/23. 

The announcement included funding for 2022/23 only.

The Finance Settlement sets out that the main funding allocation will be £5.6m, the same as in the previous two years.

The Government have published two additional grant allocations for 2022/23 (i) the Lower Tier Services Grant allocation 2022 to 2023 is £0.254m (this is the 2nd year of funding) and a new Services Grant of £0.383m which is for one year only and is being granted to authorities in recognition of the vital services delivered.

The Council Tax referendum principles allow the Council to increase Council Tax by up to 2% in 2022/23. This means if the Council sets a Council Tax of 2% or above it would have to hold a referendum to agree the increase. These principles do not include Parish Councils.

The Cabinet proposals include a 1.99% Council Tax increase for 2022/23; a new Band D charge of £333.63.

During the initial period of Covid 19 collection rate levels for Council Tax significantly reduced along with a sharp rise in the levels of  council tax support numbers. During 2021/22, collection rates started to recover however; they are still not at pre Covid-19 levels.

The Council Tax Support numbers have also started to reduce during the financial year.

Businesses in the Retail and Leisure Sector have received business rate relief during the Covid-19 pandemic.

The Council has received compensation for this loss of business rate income. The collection rate for business rates income collection is down against pre Covid 19 levels. The current pandemic is having a major impact on the collection of business rates.

The Council is remaining out of the Lancashire Business Rates pool in 2021/22 and 2022/23. This is based on the reduced protection (i.e. no individual safety net) of the Lancashire Business rates pool and the current risks from Covid such as the reduced collection rates, current level of outstanding appeals and unknown outcome of rateable challenges.

The Government have published New Homes Bonus allocations for 2022/23. In 2020/21 the grant was to be phased out, which meant receiving a one-year only payment for 2020/21 and 'legacy payments' relating to previous year's allocations. However, the Government paid an allocation for 2021/22 and have published a one- year allocation for 2022/23.

The future position on New Home Bonus or if there will be a replacement scheme is still unknown. The Council pays its New Homes Bonus into the City Deal.

2022/23 Cabinet Budget Proposals

The Cabinet have put forward the following budget strategy in working towards setting the 2022/23 Budget and Council Tax:

  • Council Tax Increase - it is proposed to increase Council Tax in 2022/23 by 1.99%.

Growth Proposals

  • Avenham Pavilion Café - A budget provision of £85k to enable the Café remains open to the public.
  • Tree Strategy and annual Tree Maintenance - £180k in 2021/21 and £138k 2023/24 onwards to fund the Tree Strategy and the ongoing tree maintenance of the trees within the Council's ownership on parks and open spaces.
  • ICT Strategy and IT increased costs - £86k per annum - contribution to enable the ICT Strategy Fund to have sufficient funds to finance the one-off costs of implementing schemes as part of the Digital First Strategy.
  • Capacity funding - use of the vacancy savings to fund essential Finance/Legal/Property Services support costs during the implementation of the Towns Fund and City Centre schemes.

Capital Proposals

The Council proposes to split the £500k Investment Fund which was re-designated to a scheme to fund Covid recovery (capital spend) and Climate change schemes 50:50 between the two schemes.

It is proposed that the £250k Covid recovery is allocated for spend on Parks and Open Spaces. A report will be presented to Cabinet in the near future setting out further details.

Continuation of Previous Budget Plans

The Council will continue with the Digital First Strategy agenda to deliver further service improvements for customer service and roll out the digital agenda to the other departments through the Service Improvement Board.

The Council's strategy is continuing to have a planned release of non-earmarked reserves to fund the shortfall in financing during the period of the financial forecast.

Contingency Plans - the Council has a list of contingency savings circa £1.3m which could be called upon in the event that significant risk materialises or further savings are required. This list contains non-statutory services. However, the Council will seek to  find alternative efficiency savings and opportunities for income generation before these savings were called upon.

Stakeholder Consultation

Cabinet carry out stakeholder consultations on the proposals including raising Council Tax by 1.99%.

The results of the consultation will be provided to Members at the Budget Council meeting.

Any savings proposals are subject to an Equality Impact Assessment (EIA). The EIAs consider the effect on people within all the equality strands in relation to the wider community; and, if and how one group is disproportionately disadvantaged by the savings and growth in relation to other groups.

The Budget Working Group who consists of Cabinet, 3 backbenchers and Corporate Management Team will meet during 2022 to work towards formulating the next efficiency plan to identify savings of £500k required in 2023/24. Consultation on the next savings plan will be carried out during the next budget process.

The General Fund Revenue Forecast

The General Fund Revenue Forecast includes the budget for the day-to-day running costs associated with the delivery of the Council's services.

The Council agreed the original 2021/22 Revenue Budget and set a Council Tax increase of 1.99% at the Budget Council meeting in February 2021.

The forecast at that time showed general fund reserves being used over the life of the forecast. The Council maintains a £1.1m minimum working balance in the General Fund.

The Council reviews key financial assumptions on an on-going basis and identifies material changes highlighted within the appendices.

During the Covid 19 pandemic, there have been more significant changes to the forecast than would usually occur. It is therefore difficult to forecast with any certainty the medium to long-term finances of the Council.

In addition, the Government publishing one-year local government finance settlements instead of multi-year settlements is a further challenge to effective forecasting of the Council's finances.

The forecast has been updated to reflect the underspend position in 2020/21, slippage of budget from 2020/21 into 2021/22, additional spending as a result of Covid 19, funding from Government and other organisations and in-year budget decisions made by Members. 

The latest estimated position is included in the information below:

  • Original Budget: set at Budget Council February 2021 (view appendix A) 22,017 (£ m)
  • Impact of 2020/21 Outturn (slippage of budget into 2021/22) 1,875 (£ m
  • Other forecast issues included in this update  -2,941 (£ m
  • Latest Estimate : Revenue Budget 2021/22 (see appendix E) 20,941 (£ m)

General Fund (GF) Monitoring

The Council has continued to submit monthly financial management returns to Government setting out the Covid-19 spend the Council is incurring and Government grant it is receiving. The financial information is incorporated into the latest financial forecast.

The financial forecast approved at Budget Council February 2021 showed a savings requirement from 2022/23 onwards. This latest forecast has been further updated with latest financial projections and the Cabinet budget proposals for 2022/23.

The latest forecast sets out a savings requirement of £500k in 2023/24.

The Council has previously agreed to the use of reserves to fund the shortfall between 'the amount the Council spends on providing its services' against 'the funding the Council receives to fund the net budget in order to achieve the minimum balance by the end of the forecast.  

For reference, the Council has a required minimum working balance of £1.1m.

The Budget Working Group which consists of Cabinet, 3 backbenchers and Corporate Management Team will work on formulating the next budget efficiency plan during 2022. These plans will take into consideration the £500k savings requirement in 2023/24 and will consider the updated position for Covid-19 and future Government funding.

Reserves and Provisions

The Council holds a General Fund Reserve and a number of Earmarked Reserves and Provisions.

These are held for various purposes:

General Fund Reserve

  • A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing.
  • As a contingency to cushion the impact of unexpected events or emergencies

Earmarked Reserves and Provisions

  • Monies set aside for future events or liabilities

Balances

  • General Fund Reserve balance 31 March 2021 - £9.880 million
  • Earmarked Reserves and Provisions balance 31 March 2021 - £41.13 million

Appendix E contains the latest forecast for General Fund reserves.

The Cabinet Member for Resources is updated with the Reserves and Balances Policy. In line with the policy the current level of balance sheet provisions and earmarked reserves will be reviewed to take into consideration any proposed call on the reserves during this financial year.

Reserves may be needed to be called upon to assist with the financial impact from Covid-19. The updated policy will include details of those approved for release or if there will be an additional call on the reserves.

In line with previous agreed budget proposals the Council has been using available reserves to enable a managed phased programme of savings and a balanced forecast. Other earmarked reserves may be used to:

(i) act as a contingency if the savings targets are not achieved; and

(ii) be used for any significant one-off costs arising from the budget plan.

There has been a significant increase in earmarked reserves as at 1 April 2021. This is as a result of the technical accounting treatment of NNDR business rates in the 2020/21 accounts.

The Council recognised the compensation funding for NNDR rates relief granted from Government in the year of receipt as required in line with accounting rules, however the deficit on the collection fund as a result of not receiving the NNDR business rates income, is only being recovered in 2021/22 to 2023/24.

A contribution from the earmarked reserves will be brought into the forecast to match the recovery of the deficit in each of the financial years. The reserves will not be used for other purposes.

External Audit

The Council has an embedded planned approach to financial management and corporate governance, safeguarding public monies and ensuring accountability.

The Council's appointed Auditors, Grant Thornton have presented a draft audit opinion to the January 2022 Audit Committee however there are some audit queries outstanding. Grant Thornton plan to have the audit fully concluded by the end of January 2022.

The Audit Committee delegated to the Chair of Audit Committee the signing off, of the Accounts. This is subject to no material items being identified.

The statutory date for authorities to approve their accounts was 30 September 2021 and the Council published reasons on the website explaining why the deadline was not being met.

As part of the Audit, Grant Thornton are required to report a Value for Money and financial resilience conclusion. Work is being finalised in relation to the 2020/21 accounts and the latest financial year.

A conclusion is expected within the next few weeks. For the previous year's accounts 2019/20 Grant Thornton concluded that Preston City Council had proper arrangements to secure economy, efficiency and effectiveness in its use of resources and did not identify any new value for money risks in relation to Covid-19 and issued an unqualified value for money conclusion at that time.

The Preston, South Ribble and Lancashire City Deal

The Preston, South Ribble and Lancashire City Deal was signed in September 2013 and is an ambitious programme of work that aims to ensure that the City Deal area continues to grow by addressing strategic transport infrastructure challenges delivering new jobs and housing.

To deliver the City Deal, partners established an infrastructure delivery and investment programme worth £430m over the lifetime of the Deal.

The programme facilitates a significant commercial development (more than 20,000 net new private sector jobs) and housing (approximately 17,400 homes); this includes four highway schemes and local community infrastructure required to support the scale of such ambitious development. As set out in the programme, a fundamental review of the City Deal has been undertaken and discussions are still ongoing.

It is expected that a report will be presented to Members during spring/summer 2022.

The City Deal Infrastructure Delivery Programme (IDP) is funded through pooled local and national private and public sector resources. This includes Community Infrastructure Levy (CIL), s.106 contributions, local major transport schemes, Homes and Communities Agency land receipts, New Homes Bonus, business rates, local authority capital programme resources and land receipts.

The original target number of new homes in Preston on the City Deal sites is 9,579 which includes an additional 1,000 properties not allocated to specific sites.

More information about the City Deal can be found on the Lancashire Economic Partnership (LEP) website.

The City Deal Infrastructure Delivery Programme sets out the projects and programmes to be funded and the forecast resources. Lancashire County Council are the accountable body. They project manage the schemes, take responsibility for the cash flow of the overall plan, and ultimately have the majority of the financial risk.

Income Transferred to the City Deal

When the City Deal model was formed it was anticipated that the contribution of income from Preston City Council would come from the following sources:-

  • Community Infrastructure Levy (CIL) receipts from residential and retail developments
  • Section 106 Contributions - assumption of additional revenue from development
  • New Homes Bonus
  • Business rates growth.

Impact for the Financial Forecast of the City Deal

Since the start of the City Deal there has been increased building of new housing which brings in additional council tax for the Council, Lancashire County Council and the other major precept authorities. Additional costs associated with serving the new housing have been built into the forecast however annual Council Tax income is estimated to outweigh these annual costs.

New Homes Bonus received by the Council is shown to be paid over to the City Deal during the current financial forecast period.

The Council has been receiving a community provision allocation.

Capital Programme - Community Infrastructure Levy and Community Infrastructure for City Deal

The Capital Programme assumes that Community Infrastructure Levy (CIL) receipts totalling received from developers will be paid over to the City Deal.

The CIL is a charge on most forms of built development; it allows a charging authority to levy a charge on owners or developers carrying out built development so that they contribute to the costs of providing the infrastructure needed to support development of the area.

The CIL funds infrastructure projects such as transport, education, leisure, and health and open space provision set out in a published list, known as a Regulation 123 list.

Collection Fund

The Council is required to maintain a separate fund (the Collection Fund) for the collection and distribution of amounts due in respect of Council Tax and National Non Domestic Rates (NNDR).

The fund records all of the transactions for billing, exemptions and discounts granted, provision for bad debts and appeals, and payments made to the Council's General Fund, the County Council, Police and Crime Commissioner and Fire and Rescue precept authorities and Central Government.

Council Tax

The deficit on the Collection Fund for Council Tax as at 31 March  2021 was £2.952m. This deficit is being shared between the Council (16%), Lancashire County Council (70%), the Police and Crime Commissioner (11%) and the Fire and Rescue Authority (4%) in 2021/22 and 2022/23.

The deficit balance is expected to decrease at 31 March 2022 to £0.909m because of a slight increase in the collection rate following a move towards normality compared to the previous year and Covid-19.

The latest forecast is for a slight increase in the in- year collection rate from 91.0% to 91.5%. The Council's share of the forecast deficit is £0.150m.

Business Rates (NNDR)

Prior to 2013/14, the Council collected NNDR on behalf of Central Government.

All the NNDR income was paid directly into a central pool which was re-distributed to individual councils according to a needs-based formula. This system was replaced by the Business Rates Retention Scheme. Under this scheme the Council retains a 40% share of its NNDR.

The remaining income is shared between Central Government (50%), the County Council (9%) and the Fire and Rescue Authority (1%).

As at 31 March 2021 there was an accumulated deficit on the Collection Fund for NNDR of £29.426m.

The deficit is being shared between the City Council, the County Council, the Fire and Rescue Authority and Central Government in 2021/22 and 2022/23.

The City Council's share of the deficit is £11.570m.

The deficit is mainly due to the reliefs granted to business by central government in response to the Covid 19 pandemic, which meant that many businesses did not have to pay Business Rates during 2020/21. Section 31 Government Grant is received by the Council to compensate for the new NNDR reliefs the Council is statutorily obliged to grant, but this accounted for outside the Collection Fund.

The Council received £30.035m of Section 31 grant to cover these reliefs in 2020/21 and a reconciliation of the reliefs given and grant received will take place during 2021/22.

The latest forecast for 2021/22 is for an in-year deficit of £10.079m (still to be confirmed), of which the Council's share is £4.032m. This is largely due to an expected increase in retail reliefs given due to Covid 19.

The in-year collection rate is expected  to increase slightly from 92.2% to 93.0% as a result of Covid 19 restrictions being lifted.

Funding is being set aside in an earmarked reserve to smooth peaks and troughs over the life of the forecast.

The set aside as at 31 March 2021 was unusually high due to the receipt of the Section 31 grant in 2020/21 to fund the business rates relief. This will be used to cover the deficit arising from reduced collection of NNDR receipts only being recovered in the following years.

A contribution from the fund will be brought into the accounts to fund the deficit recovery in 2021/22 and 2022/23.

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