The Audit Findings for the London Borough of Brent, to be considered by the Audit and Standards Committee on Tuesday September 8th are rather better than might be expected. LINK
The report by Grant Thornton states:
.....To put this in further context, Brent Council could receive no RSG, council tax or business rates in 2020/21 and still balance the books using reserves. This is a much stronger position than virtually all other councils, however it must be noted that the reserves are earmarked to support strategic projects outlined in the Council’s capital programme and many of these reserves cannot be used to support revenue costs.
looks forward to 2020/21 and the impact of the Covid19 measures taken by the
Council during lockdown and the impact on income. Having had shaky
reserves in the past the Council has been reluctant to eat into reserves but
may have to as a consquence of a £29m funding gap, as well as reducing demand
for services and 'efficiency' cuts:
If there is a shortfall the Council has contingency plans to keep it on a sound financial footing. The Council will use the full range of options available, including (but not limited to) taking steps to reduce demand for services, implementing further efficiency savings, streamlining processes, and as a last resort re-diverting earmarked cash reserves as a one-off measure. The Council holds general reserves of £15.1m and £146m in earmarked reserves (excluding Community Infrastructure Levy funds and other ring-fenced reserves) which are held to meet specific identified purposes or future expenditure commitments, a large proportion of which are for financing the capital programme.
A review of
the capital expenditure plan seems inevitable. Budget planning and consultation
will take place soon. One of the key issues will be what happens to
Council Taxat a time when many residents will be strapped for cash as a result of unemployment resulting from the economic downturn.
EXTRACT FROM THE AUDITOR'S REPORT
2019/20 Financial Return
In a year where March saw the outbreak of the Covid-19 pandemic, the Council has performed well to achieve a breakeven position for its service area budgets. The Council responded to the pandemic situation quickly, making critical decisions in response to constantly moving government guidance. With only 2 weeks remaining of the 2019/20 financial year with the outbreak of the pandemic, impact on the financial outturn was minimised for 2019/20 but will be a larger impact on 2020/21.
The outturn for 2019/20 highlights the effective management action taken to address the pressures throughout the year. The £1.5m overspend in Children and Young Persons (CYP) (in part offset by contingency funds within CYP reserves) and £0.6m overspend in Community Well Being were offset by underspends within Regeneration and Environment.
The use of CYP earmarked reserves illustrates that the Council does have ongoing financial pressures which need to be addressed. However, this needs to be put in the context of income growth opportunities the Council’s reserves position. Brent has over £134.8m of usable reserves, excluding capital reserves, which can ultimately be deployed to address in-year shortfall. To put this in further context, Brent Council could receive no RSG, council tax or business rates in 2020/21 and still balance the books using reserves. This is a much stronger position than virtually all other councils, however it must be noted that the reserves are earmarked to support strategic projects outlined in the Council’s capital programme and many of these reserves cannot be used to support revenue costs. It is also worth noting that the Council is very clear about finding solutions in CYP going forwards.
The Council’s MTFS set in 2019/20 identified £11.4m savings required for 2020/21 and a best estimate budget gap of £20m for 2021/22-2022/23. In the November 2019 MTFS update a comprehensive review of technical budget assumptions took place, including a review of the 2020/21 savings plans and estimated savings of £4.28m to be delivered in 2021/22 and £1.77m to be delivered in 2022/23.
As a result of the pandemic it is expected that service departments will experience income and expenditure pressures in 2020/21. The magnitude of the pressures will depend on the severity and length of the pandemic. The Council has modelled the financial impact based on lockdown periods of 3 and 6 months and has a cost tracker to estimate and record the additional pressures relating to additional expenditure, loss of income, impact on savings and capital programmes, and treasury management issues. The Council estimates the 2019/20 impact to be £0.4m while for 2020/21, a 3-month lockdown period has an estimated lost income impact of £19.8m, with another £14.9m on top of that for a 6-month lockdown. The Council reports these figures to MHCLG fortnightly.
The net cost of Covid-19 to the Council is expected to be £47.6m (£42.7m of additional income and expenditure pressures and £4.9m of slippage in savings plans), which is far in excess of the £21.2m funding to be received from central government. The cost estimates are considerable, and the Council has been working to the assumption that costs will be fully reimbursed. Central government recently announced a new package of support which includes provision for some income losses to be reimbursed where losses are more than 5% of a council’s planned income from sales, fees and charges, with central government covering up to 75% of the remainder. Also, any deficits on council tax and business rates income will be allowed to be spread over 3 years rather than 1 year. Detailed workings of the scheme will be confirmed as central government drafts the statutory instrument that will effect the changes. This leaves the Council with an estimated gap of £26.4m before support for income losses is taken into account. If there is a shortfall the Council has contingency plans to keep it on a sound financial footing. The Council will use the full range of options available, including (but not limited to) taking steps to reduce demand for services, implementing further efficiency savings, streamlining processes, and as a last resort re-diverting earmarked cash reserves as a one-off measure. The Council holds general reserves of £15.1m and £146m in earmarked reserves (excluding Community Infrastructure Levy funds and other ring-fenced reserves) which are held to meet specific identified purposes or future expenditure commitments, a large proportion of which are for financing the capital programme.
The Council has modelled indicative forecasts of the council tax base and business rates income going forward. Modelling is challenging for the Council given that the Council receives c£50m (approx. 40% of net rates payable) of additional relief from central government to further discount the bills of businesses in retail, leisure and hospitality sectors, as well as small businesses:
• the Council received c£64m from central government to provide grants (between £10k-£25k) to support the above businesses; and
• all other business rate payers having difficulty in paying were offered payment deferrals in line with central government guidance.
Due to the above, the amount of NDR income collected to date compared to budget has changed significantly, and forecasting future collection is dependent on how long different business sectors take to recover, if at all. The Council has modelled business rates collection forecast for 2020/21 for the amounts collected and to be collected over a revised collection profile, against a reduced collectible debit, to support future business rates income projections. However, the amount of business rates the Council is allowed to retain is largely dependent on the future business rates regime and the amount of section 31 grant for certain business sectors. Also, the Council is part of the London business rates pool in 2020/21. London Councils will be modelling the potential impact of a deficit on the pool and individual boroughs and the results are expected later in the year. This exercise along with other intelligence and data gathering exercises on collection rates will be critical to better understand the potential impact on the 2020/21 budget and future budget assumptions for business rates income.
Over the past 2 years, the Council has been addressing historic overspends and undertook a comprehensive review of demographic pressures and other expenditure pressures, ensuring the Council could move to a more sustainable financial position. Following the Covid-19 outbreak the Council’s financial position has changed significantly. The impact of the loss of fees and charges, and emergency costs have had an immediate effect on all local authorities. In the longer term there is likely to be further squeeze on public spending, which could impact future funding settlement allocations.
The 2020/21 budget agreed in February 2020 included savings of £7.4m to deliver a balanced budget. Analysis shows that £0.3m of the planned savings are at risk of not being delivered at all, £2.5m of the planned savings have already been delivered, and £4.6m of the planned savings will not be delivered in 2020/21 (the Council will look to make these savings in 2021/22 instead). The 2020/21 budget also agreed business plans which included savings of £4.3m. Along with review and tracking of Covid-19 cost pressures, the savings position is being monitored daily and monthly monitoring reports and forecasts are reported to the Departmental Management Team. At this stage, all indications are that the 2021/22 savings (including the £4.6m of planned savings for 2019/20) will be achieved. Looking ahead, the savings forecasts will be reported quarterly and challenged and CMT and Cabinet, as well as the Resources and Public Realm Scrutiny Committee. As well as reporting progress of savings delivery the update reports will include mitigating actions or other interventions if there are delays in implementation or risk of delivery.
Proposed budget setting for 2021/22
Based on information available to date, the Council estimates that ongoing and recurring pressures will be in the region of £11m to £29m from 2021/22 across all service areas and council tax collection. At this stage, the estimates excludes future losses on business rates whilst further modelling is undertaken. Therefore, without additional funding or relives from central government the budget gap is likely to increase further. The Council’s estimates will be refined over the summer and are a major factor in the construction of the 2021/22 budget. Robust and credible plans will need to be developed and agreed in February 2021 to deliver a legally required balanced budget. At this stage, it is not clear when the Spending Review will be announced, or what the LG Finance Settlement for Brent in 2021/22 will be. The lack of clarity means that the Council will need to continue to plan with little or no funding certainty over the medium term. The Council expects to need to take difficult decisions about which services to prioritise and protect, and which to reduce in order to continue to deliver affordable and sustainable budgets.
To close a gap of this magnitude and in a relatively short space of time there are 3 main options:
• Further savings – options are limited given the current savings programme already includes a significant number of efficiencies and new income generation options are likely to be limited.
• Reduce growth assumptions – the current MTFS includes £13m of annual growth but there is a risk that reducing growth assumptions will store up pressures in future years.
• Scale back the capital programme – pausing or stopping specific capital schemes funded by borrowing would free up corporate revenue budgets set aside to provide capital financing.
A further consideration is if central government introduces new interventions specifically for long term Covid-19 related pressures, such as a multi-year minimum funding guarantee to compensate local authorities for income losses beyond their control. Another option may be to allow the capitalisation of losses, which would ultimately be funded by increased borrowing. The options will be further examined to ensure their consequences are properly understood and set out for members and the outcome of the review will be presented to Cabinet as part of the draft 2021/22 budget in October 2020.
The Council continues to maintain reserve levels much above those of its peers, but it is recognised that of the £398.4m total usable reserves and capital receipts reserve, £249.3m relates to reserves built up to help to finance the Council’s £1bn capital expenditure plans.
Excluding the capital reserves, HRA and schools’ reserves leaves general fund reserves of £134.8m, which is close to the average level of reserves for London boroughs. However, the Council must carefully consider the use of its reserves to support revenue shortfalls as it is a non-recurrent source of funding, and use of reserves on a large-scale risks creating structural overspends if the Council’s finances do not recover quickly and income is reduced long term.
From an audit point of view, the Council has managed its revenue reserves in a way that makes it better placed than most London councils to survive the challenges of the Covid-19 pandemic from a financial perspective. This prudent approach to reserves must be continued to address the risk of future pandemics, recessions and other issues or events that may impact on the Council’s financial sustainability.