Minutes:
The Committee considered a report by the Director of Resources and Deputy Chief Executive (circulated previously) regarding the 2022-23 Revenue Budget and Inflationary Pressures.
The Director of Resources and Deputy Chief Executive highlighted the following:
· The Revenue Budget 2022-23 of £13.722m was approved by Full Council on 23 February 2022 alongside the future year budget projections for 2022-2028 within the Medium Term Financial Strategy.
· With the UK’s inflation rate rising from 5.5% at the start of the year to 11.1% in April 2022, and global costs rising, research carried out estimated that nationally Councils’ costs from inflation had risen from £789m in February when they set their budgets to £1.5bn as of June, leaving them with £729m of additional unfunded costs. A number of authorities were particularly exposed to these rising costs because of the nature of delivering services in large rural areas.
· Even though the Council were only a third of the way through the financial year, with inflation running at such a high level it was important that members were aware of the additional pressures on the budget for the current financial year and also the impact this had on the base budget ongoing for future years.
· The report set out the current in-year pressures being faced together with an updated high-level projection ongoing and measures being put in place to mitigate the unprecedented financial burden on the Council.
· The Medium Term Financial Strategy (MTFS) was last considered by Strategy and Resources at its meeting on 7 February 2022 and approved by Council at its meeting on 23 February 2022.
· Record energy prices, inflation in external contracts, rising fuel prices and increases in staff pay were expected to add significant pressure to the Council’s budget which had already highlighted a £2m budget gap for 2023- 24 due to the impending Government Fair Funding Review and reduced government funding as a result.
· The 2023-24 budget assumed a reduction of around £1.1m of income from retained business rates following the above review and a reset of business rates income. In addition, a forecast reduction from New Homes Bonus government grant of around £0.950m had also been predicted. However, these uncertainties had been prolonged due to the Fair Funding Review continually being delayed by Government and only a one-year finance settlement being given which did not help Councils plan for the medium term.
· The most recent pay claim for the 2021-22 year was settled in February 2022 and an agreed award of 1.75% effective from April 2021 was settled and paid in March 2022. This demonstrated how long it could take to settle a pay claim between the Unions and the Employers, 11 months in 2021-22 year.
· The Revenue Budget 2022-23 had assumed a 2% pay rise and likewise a further 2% rise factored into the Medium Term Financial projections above to 2028 year.
· The pay claim 2022-23 had now been received from the Unions and they had requested for a minimum of £2,000 on each pay scale point or RPI inflation (11.1% in April 2022), whichever was the highest outcome.
· With approximately 440 FTE staff, even the lowest costing of the above claim would cost the Council an additional £900,000 in 2022-23 and this cost was then an ongoing impact within the base budget for the following financial years.
· Financial modelling was shown on the potential outcomes based upon a higher increase than the 2% budgeted rise and showed the potential cost implication on the 2022-23 base budget of rises of 3% up to 11% and the increased cost this could produce.
· In addition were the financial implications of the National Living Wage (currently £9.50 per hour) and potential increased to this rate from April 2023 and April 2024, which would have a cost impact on the lower scale point ranges to ensure those rates were being aligned and adhered too, thus being in place prior to those effective dates.
· Further modelling had been carried out to determine the cost impact of a National Living Wage increase to £10.50 per hour (potentially from April 2023) and £11.50 per hour (potentially from April 2024) and the numbers of the current workforce this would impact upon;
Ø Increase to £10.50 per hour – impact 20 staff and cost of £20,750
Ø Increase to £11.50 per hour – impact 106 staff and cost of £256,790
· A claim being settled at the higher level of the above modelling would of course be financially unsustainable for Councils, not only to be able to fund in the current year but also the ongoing impact this had on the base budget level. The additional impact from the potential rise in the National Living Wage was the ‘knock-on’ effect this would have with the wider pay scales within the Council and ensuring equity and evaluation of roles throughout the workforce; therefore this projected cost could escalate into a much higher impact upon Councils.
· National employers were considering the above pay claim and would be looking to make an offer to the Unions by the end of July 2022; thus by the time consultation had taken place with their members we were not going to have a settlement agreed until at least October 2022 at the earliest and as was the case in the 2021-22 year this could go on much longer.
· In terms of projected impact for 2022-23; there had been discussions with Chief Financial Officers throughout Devon and the consensus was one of assuming a pay award in the region of between 3% and 4%.
· Therefore for 2022-23; the Council could be looking at an additional cost of around £304,000 over and above what had been budgeted for and that cost would be an ongoing impact into the future year budgets too.
· The Council’s budgeted energy costs for 2022-23 were Electricity (£196,000) and Gas (£14,000). The Crematorium energy costs were contained within the Joint Committee Budget which was held separately for North Devon and Torridge Councils; and a recent report to this Committee referred to the in-year price increase for Gas and how this cost was being managed within the Crematorium finances.
· Over the last couple of financial years the Council had incurred Electricity costs of around £170,000 per annum. The Council factored in a £26,000 increase (15%) into the 2022-23 budget; however based upon the prices the Council were incurring through the Crown Commercial Services contract they were looking at an additional cost of around £63,000 over and above what the Council had budgeted for and this cost would be potentially be an ongoing impact into the future year budgets too unless prices eventually started to reverse.
· The annual usage of fuel across our vehicle fleet was approximately 450,000 litres and the budget for 2022-23 was increased with an inflatory increase and set at a total of £524,000.
· Financial modelling had been carried out based upon the fuel rates the Council had been experiencing since the budget was approved and assuming a further increase of either 5% or 10% sensitivity.
· The sensitivity modelling showed the potential impact of further increases to the fuel budget; if rates stayed at the current May 2022 level then the Council would be looking at an additional cost of around £83,500 and if rates continued to rise then a potential additional cost of between £114,000 and £144,000.
· With so much uncertainty around the fuel prices and longevity of continued increases, the Council was assuming worst case scenario of the above modelling and looking at an additional cost of around £144,000 over and above what had been budgeted for and this cost would be potentially be an ongoing impact into the future year budgets too, unless prices eventually started to reverse.
· Looking through the wider Revenue Budget there were of course other areas where inflationary increases could impact upon the cost of service provision, such as third party contractors passing on higher costs they were incurring onto the cost they were charging the Council.
· The Council had base budgets for Repairs and Maintenance of £355,000 and Supplies and Services of £5,720,000. An increase of the following would have a financial impact of:
Ø 2% increase on above £6,075,000 budgets – additional cost of £121,000.
Ø 5% increase on above £6,075,000 budgets – additional cost of £304,000.
Ø 10% increase on above £6,075,000 budgets – additional cost of £608,000.
· The Council generally managed the above budgets and prioritise spend within the allocated budget amount and would continue this throughout the year; however it was prudent to assume some level of impact and assumed an additional cost of around £200,000 over and above what had been budgeted for and this cost would be potentially be an ongoing impact into the future year budgets too, unless prices eventually started to reverse.
· Nationally, Councils were flagging up risks of additional costs arising from service contracts and outsourced services such as Leisure, Grounds Maintenance, Theatres or Waste and Recycling services. Contractors were experiencing the same rising costs as Councils and these services were extremely vulnerable to changes in energy prices and also carried the risk of reduced subscriptions as the public made their own cutbacks due to cost of living pressures. The Council just need to be mindful of these associated risks with third party contractors.
· The final area of risk which was becoming more prevalent was the risk on Capital Programme especially with key capital projects, one example of this being the Future High Streets Fund project. This was an £11million project (funded by £6.5m external government grant and £4.5m from NDC) and was approved by Members in February 2021 based upon a costed model which included a level of contingency. The construction element of this project is not being tendered for until this year.
· In the last 12 months, the Council had seen significant increases in material costs (together with delayed availability of materials and contractors) and thus was a serious risk in terms of escalating cost and time on capital projects. The project team was currently working closely with the external consultants on ‘value engineering’ the works with an aim of staying within the boundaries of the original budgeted cost.
· However, one key factor of the government funding was agreed specific outputs from the project in terms of areas such as delivery of units of housing etc and depending on the outcomes from the value engineering exercise; to ensure a deliverable project within budget may require decisions and a movement around these future outputs and deliverables if this was going to succeed within the original financial parameters.
· This was a risk that the Council would need to manage carefully, not just with this project but with all our major capital schemes and ensure that they had an open and transparent dialogue with our stakeholders and funding partners at the earliest opportunity.
· The inflationary pressures highlighted within the report indicated a number of potential financial outcomes in terms of impact upon the Council’s 2022-23 budget and beyond.
· The assumptions made (which as shown in the modelling could vary from this significantly) were summarised as:
o Staffing costs (assumption 4%) £304,000
o Energy costs £63,000
o Fuel costs £144,000
o Other costs £200,000
o Potential additional costs £711,000
· Also on the agenda was the Quarter 4 Performance and Financial Management 2021-22 report, which reported the outturn position for last financial year. This was a positive report following some budgetary underspends in the last quarter together with some additional income, over and above the anticipated level; resulting in a net budget surplus of £604,000.
· These funds were placed back into earmarked reserves to fund additional capital projects coming forwards through business cases; funds for the review of the Local Plan and the balance being placed into the Budget Management Reserve.
· The balance in the Budget Management Reserve had accumulated since the initial contribution at the end of the 2020/21 financial year of £375,000; together with some in-year contributions from additional funds received and a transfer from additional business rates income (over and above the budgeted level) – this reserve had an opening balance at 1 April 2022 of £935,879.
· In terms of mitigating the in-year budget pressures being highlighted above, the recommended approach was to meet these additional cost pressures in 2022-23 through the Budget Management Reserve, together with any in-year budget savings/underspends that materialise.
· The most pressing concern for the Council was the ongoing impact of these budgetary pressures; we can mitigate against the in-year pressure but as was shown earlier the Council were already forecasting a £2m budget gap before the current inflationary pressures were being experienced.
· There was a feeling amongst many that the planned Business Rate reset may be delayed by one further year to 2024-25 which did impact upon the original figures shown earlier as these figures assumed a much reduced Business Rates income for next year 2023-24 of £3.7m; whereas the current budget for this income was £4.7m plus in the current period the Council was seeing a return through the Devon Pool of around £250,000.
· Revised budget projections for 2022-23 to 2027-28 were shown.
· The assumption made was that the current 2022-23 additional inflationary pressures will continue into 2023-24 and beyond with minimal inflation reversal; together with the additional impact of further 2023-24 pay claim settlements (over and above already 2% factored into the original forecast) and National Living Wage implications; together with some element of further additional inflationary burden. An indicative amount of £450,000 had been included. The revised forecast then assumed a return to original predicted inflation levels in 2024-25.
· There was much uncertainty as already highlighted Government Financial settlements were only currently one-year and the level of funding for 2023-24 would not be announced until December 2022.
· It was therefore important that Members acknowledged the importance of firstly the level of potential budget gap the authority faces and secondly work cross-party to identify options to bridge the forecast financial gaps through potential revenue budget savings and/or generation of additional income streams to the Council. The latter of course linked closely to the adopted Commercialisation Strategy which Members approved in November 2020.
· Officers would like to work closely with Members over the Summer period and therefore it was recommended that a Cross Party Working Group be set up to hold a series of budget workshops to identify options for mitigating the budgetary pressures being faced and then present these back in the Autumn prior to the detailed budget setting process for 2023-24 taking place.
In response to questions from the Committee, the Director of Resources and Deputy Chief Executive advised the following:
· The Council was in an unprecedented situation regarding the funding gap, which was a real challenge in terms of inflationary increases, employee costs and the living wage etc.
· That Members had to act as soon as possible and not delay any decisions with regards to the funding gap until after the elections in May 2023.
· Officers working within the Housing and Planning teams were working extensively with applications and the ongoing housing crisis.
· There were also cost pressures with the delivery of the Future High Streets Fund agenda, which could have an impact on the progress with the Levelling Up agenda.
· There was a need to join the national debate and lobby the government as part of Team Devon.
In response to a question from the Committee, the Chief Executive advised the following:
· The Council had consulted with a barrister regarding any grounds to challenge the outcome of the Yelland Planning enquiry and awaited a response.
RESOLVED that:
(a) the report outlining the budgetary pressures being faced by the Council for the 2022-23 Revenue Budget and the impact this has on the future year ongoing Revenue Budget be noted; and
(b) a Cross Party Working Group be set up to hold a series of budget workshops to identify options for mitigating the budgetary pressures being faced and present back to a future meeting of Strategy and Resources Committee in the Autumn prior to the detailed budget setting process for 2023-24 commencing.