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.
