Part 2 - Medium Term Financial Strategy (MTFS)
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 (2022/23) and projections for the years 2023/24 to 2026/27 and identifies the key financial risks for the Council.
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 Council reviews all key financial assumptions on an on-going 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 (2022/23) and projections for the years 2023/24 to 2026/27. 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 Programme, 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 financial period for major development plans, the vehicle replacement programme, the core and major asset maintenance plan, long-term investment and 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
- Budget Holders/Capital Project Managers responsibility for budgets
- Review of the Council's earmarked Reserves and balances
- Performance reports/Updates to Cabinet Member Resources
- Financial Management - budget monitoring / forecasting / reporting
- Treasury Management specialist external advice
- Towns Fund Governance - Monitoring and Evaluation Board
The Council is implementing improvements to Performance Management.
The Local Government Finance Settlement 2023 / 24 and update on future Government Funding
On 6 February 2023, the Government published the Local Government Finance Settlement for 2023/24. The announcement included funding for 2023/24 only.
Appendix E sets out the funding from Government. For 2023/24 a grant which is usually received separately has been rolled into the main funding allocation, called the Settlement Funding Assessment, as Revenue Support Grant.
The Government is providing an additional one-off funding guarantee to ensure all Councils receive a minimum of 3% increase in spending power before making local decisions. The one-off grant is £0.476m in 2023/24. The Council is also receiving a Services Grant of £0.225m. Assumptions have been included to estimate Government funding from 2024/25 onwards however actual allocations for this period are currently unknown.
The Council Tax referendum principles allow the Council to increase Council Tax by up to 3% in 2023/24, for 2022/23 it was 2%. This means if the Council sets a Council Tax of 3% 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 2.99% Council Tax increase for 2023/24; a new Band D charge of £343.60.
Council tax collection rates and Council Tax support levels have fluctuated over the last couple of years. During Covid collection rates reduced and Council Tax support increased. Collection rates then started to recover, and Council Tax numbers started to reduce. Recently however, the Cost of Living crisis is having an impact and collection rates are starting to reduce again. The Council is proactively assisting residents and communities during this next crisis.
The collection rate for business rates income has increased following the reduction seen during Covid. At the moment the collection rates have not been impacted, however this is being closely monitored during the Cost of Living crisis.
The Council is remaining out of the Lancashire Business Rates pool in 2022/23 and 2023/24. This is based on the reduced protection (i.e., no individual safety net) of the Lancashire Business rates pool.
The Government have published New Homes Bonus allocations for 2023/24. This is a one-year only payment. The future position on New Home Bonus or if there will be a replacement scheme is still unknown. The Council has previously paid its New Homes Bonus into the City Deal.
2023/24 Cabinet Budget Proposals
The Cabinet have put forward the following budget strategy in working towards setting the 2023/24 Budget and Council Tax:
- Council Tax Increase - it is proposed to increase Council Tax in 2023/24 by 2.99%.
- Vacancy Savings Challenge - Ongoing savings of £100k per annum from staffing budgets by increasing the vacancy savings target in line with current turnover and vacancy rates.
- Revenues and Benefit Shared Service with Lancaster City Council - Ongoing savings of £140k per annum (split 50/50) £70k for the Council, from staffing restructure.
- Planning Service - £25k in 2023/24 rising to £50k 2024/25 onwards from removal of a vacant post in the Planning Department.
- Short-term reduction in non-staffing budgets - Savings of £100k in 2023/24 and £200k in 2024/25. As a result of the recent successful Government grant bids a couple of the Council's non statutory services will be reprogrammed to concentrate delivery on the projects within the bids. This is temporary and does not impact on staffing budgets. The budgets will be reintroduced following completion of schemes and when capacity allows schemes to go ahead.
- Corporate Management Team Efficiency Challenge - £200k from 2023/24 onwards - efficiency challenge review looking at underspends and more efficient ways of working,
- Re-phasing of Capital Programme - reduction in Minimum Revenue Provision budget over the life of the forecast by delaying the implementation of capital schemes.
- Housing/Licensing Feasibility Study - A budget provision of £40k in 2023/24 for a feasibility study.
- Climate Change Feasibility Studies - £50k in 2023/24 to allow feasibility studies to be undertaken on a number of climate change schemes.
Contribution to Earmarked Reserves
- Contribution to the next Guild 2032 - the Council is contributing an annual percentage of council tax to set aside funds towards the next Preston Guild 2032.
The Council has undertaken a review of capital schemes and has rescheduled the programme to take into consideration the major work on the Towns Funds schemes and the need for borrowing against the schemes.
The borrowing saving from rescheduling a number of schemes is partially offsetting the increase in borrowing costs from increased interest rates.
Continuation of Previous Budget Plans
The Council continues 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.
Cabinet carry out stakeholder consultations on the proposals including raising Council Tax by 2.99%. 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 2023 to work towards formulating the next efficiency plan to identify savings of £600k required in 2024/25. 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 2022/23 Revenue Budget and set a Council Tax increase of 1.99% at the Budget Council meeting in February 2022. The forecast at that time showed general fund reserves being used over the life of the forecast and a saving requirement of £0.5m per annum from 2023/24.
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 2022/23 the economy has been volatile with interest rates increasing, inflation at a high, costs of construction and steel increasing significantly along with utilities costs and fuel.
The forecast position is constantly moving and therefore it is difficult to forecast with any certainty the medium to long-term finances of the Council. Whilst the Government publishing a budget announcement which covered a two -year period the Council has only received finance allocations for 2023/24. This is a further challenge to effective forecasting of the Council's finances.
The forecast has been updated to reflect the underspend position in 2021/22, slippage of budget from 2021/22 into 2022/23, 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 table below:
|Revenue Budget||2022 / 23 (£m)|
|Original Budget: set at Budget Council February 2022 (see appendix A)||22,620|
|Impact of 2021/22 Outturn (slippage of budget into 2022/23)||2,125|
|Other forecast issues included in this update||-2,181|
|Latest Estimate : Revenue Budget 2022/23 (see appendix E)||22,564|
General Fund (GF) Monitoring
The Council has embedded financial monitoring procedures and processes. The latest financial projections are incorporated into the latest financial forecast.
The financial forecast approved at Budget Council February 2022 showed a savings requirement of £500k from 2023/24 onwards. This latest forecast has been further updated with latest financial projections and the Cabinet budget proposals for 2023/24.
The latest forecast sets out a savings requirement of £600k in 2024/25. 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 2023. These plans will take into consideration the £600k savings requirement in 2024/25. The savings target may change depending on the current economic position. If prices do not increase as projected then the target may reduce, however if costs continue to increase the target may need to increase. This will be closely monitored during 2023.
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
- General Fund Reserve balance 31 March 2022 - £11.441 million
- Earmarked Reserves and Provisions balance 31 March 2022 - £32.415 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.
Inline 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.
Recently the Councils earmarked reserves have been significantly higher than in previous years by up to £16m.
Members should note this is mainly due to the technical accounting treatment for NNDR business rates compensation funding received from Government during Covid.
The income had to be recognised in the year of receipt, however, the deficit on the collection fund from not receiving the NNDR business rates income during Covid is only being recovered over the period 2021/22 to 2023/24.
This has distorted the level of earmarked reserves held by the Council. A contribution from the earmarked reserves is being brought into the forecast to match the recovery of the deficit in each of the financial years and this element of the reserve is not available for other purposes.
During the Audit of the 2020/21 Accounts a national issue arose regarding the audit of infrastructure assets. Specifically, where authorities had incurred expenditure on the replacement or enhancement of existing infrastructure assets. Grant Thornton along with other audit firms began to liaise with the Financial Reporting Council and CIPFA on this issue. At the time of the Audit meeting on 27 April 2022, the issuing of all local government audit opinions had been put on hold until further guidance had been published.
The Council reviewed its infrastructure assets during 2022 and following some adjustments the 2020/21 accounts were presented to Audit Committee in December 2022 for approval after receiving an unqualified opinion from the external auditors.
The statutory date for the Section 151 Officer to sign off the 2021/22 accounts was 31st July 2022. However, due to the outstanding issue of accounting for infrastructure assets the accounts were not signed off at that date in instead a notice was published on the Council's website explaining the reason. The accounts were signed off during December 2022 and the external audit is currently underway and is planned to be concluded by end of February 2023.
The final 2021/22 accounts are to be presented to Audit Committee during March 2023 for approval. The delay and issue with Infrastructure Assets has been the case with quite a high % of Councils throughout the country.
As part of the Audit, Grant Thornton is required to report a Value for Money and financial resilience conclusion. The Value for Money conclusion was reported to a December Audit Committee for 2020/21 accounts. The Value for Money conclusion for the 2021/22's accounts is expected to the reported to March 2023 Audit Committee.
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 to deliver 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.
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 into the City Deal would come from the following:
- Community Infrastructure Levy (CIL) receipts from residential and retail developments
- Section106 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 has been paid over to the City Deal.
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.
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.
The deficit on the Collection Fund for Council Tax as at 31 March 2022 was £2.520m. This deficit is being shared between the Council (15%), Lancashire County Council (70%), the Police and Crime Commissioner (11%) and the Fire and Rescue Authority (4%) in 2022/23 and 2023/24.
The balance is expected to be a surplus as at 31 March 2023 to £0.636m. This is due to an increase in the overall Council Tax base because of the amount of new homes and a fall in the previous year's bad debt provision due to a return to normality after Covid 19. The Council's share of the forecast surplus is £0.107m.
Business Rates (NNDR)
Under the Business Rates Retention 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%). The Council is not part of any Business Rates Pool for 2022/23.
As at 31 March 2022 there was an accumulated deficit on the Collection Fund for NNDR of £4.753m.
The deficit is being shared between the City Council, the County Council, the Fire and Rescue Authority and Central Government in 2022/23 and 2023/24.
The City Council's share of the deficit is £1.902m. The deficit was 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 2021/22. 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 £7.853m of Section 31 grant to cover these reliefs in 2021/22 and a reconciliation of the reliefs given, and grant received will take place during 2022/23.
The latest forecast for 2022/23 is anticipating an in-year surplus and figures will be set out in the document presented to Budget Council.
Funding is being set aside in an earmarked reserve to smooth peaks and troughs over the life of the forecast.