Frequently asked questions about the implications for our Medium Term Financial Strategy
- If cuts might ultimately be needed, including to jobs, isn't it better to stop recruiting into permanent roles now so that staffing establishment stops growing, and thus fewer job losses are needed later?
Over recent years, local authorities all around the country have faced challenging financial times. A big proportion of local authority funding to spend on services used to come directly from central government, but this has very heavily reduced by successive government cuts and changes over the last decade. This means that today nearly all of local authority income has to come from Council Tax and a council's share of Business Rates, whilst still maintaining services.
Where the vast majority of councils have had to make significant service cuts and savings, Uttlesford has largely successfully avoided this, and the Council's financial plans for the next five years - set out in its Medium Term Financial Strategy - are also forecast to deliver services without needing to make substantial savings to continue to balance our books.
This success has been through prudent property investment and effective management of the tax-payers' money that the Council is trusted with. We now have some important new challenges to face.
How has Uttlesford succeeded in managing these common challenges differently to most other councils in recent years?
One of the largest elements that has contributed to Uttlesford District Council's healthy financial position that has seen it largely insulated from the financial pressures facing most other councils, has been the authority's approach to borrowing and investment.
The additional income that the Council needs has come from building a risk-balanced, diverse property portfolio. This investment portfolio generate income from rentals which is forecast to generate circa £7.1 million of annual income by the 2023/24 financial year. This income is important because it allows Uttlesford to be a low-tax, high service authority. The investment income is used to fund a significant part of the Council's core £16.2 million spending on public services, as well as discretionary programmes.
This additional spending is in some key priority areas, and includes a £1million fund to support the Council's Climate Change action plan, £1million for economic recovery and £450,000 for sports provision, and investing in the Planning and Development capability.
There are potential changes on the horizon being considered by the Government that would affect how local authorities borrow and invest.
The new rules would limit further similar investments by local authorities. In addition local authorities may be required to retain a portion of their income as financial reserves to protect against a drop in property value, instead of being able to use all the income to fund services.
Depending on the nature and scope of any changes to rules, the Council:
· May not be able to make further similar investments, which is not a huge problem as the Council has already made the majority of its investments and they are already risk-balanced;
· May need to sell some of its property portfolio, which would generate an immediate cash windfall for the Council, but would reduce the ongoing income from rentals;
· May be required, as part of Minimum Revenue Provision planning, to retain part of the income as cash reserves, reducing the income that can be used to fund services.
Looking ahead to the next financial year, running from April 2022 to March 2023, the budget has not yet been set, but investment income would be expected to fund circa 44% of the Council's public services.
The Council's spending on council housing is managed separately from the General Fund in the Housing Revenue Account - and is completely unaffected by the possible changes in financial rules.
The Council has built up a portfolio of seven commercial properties over the last three years:
- Chesterford Research Park - the biotechnology park just north of Saffron Walden
- Skyway House Takeley - let to Weston Homes on a 20 year lease
- Distribution Centre, Chorley - let to Waitrose Ltd on a 30 year lease
- Distribution Centre, Gloucester - let to Amazon on a 15 year lease
- Headquarters Building, Tewskesbury - let to Moog on a 35 year lease
- Stane Retail Park, Colchester - let to Aldi (20 year lease) and B&Q (15 year lease)
- Veterinary Hospital, Livingston - let to the Pets at Home group on a 20 year lease
By design the portfolio is dispersed by investment value, industry segment and geography, so reducing the risks.
All seven assets have tenants who pay the Council rent. The total rental income projected for 2023/24 is £12.6 million.
The seven properties cost the Council circa £275 million. The purchases have been financed by borrowing, either on long-term or short-term loans. The Council has successfully negotiated extremely low borrowing costs on its loans - the costs of paying the loans for next year, and associated professional fees, comes to approximately £5.5million.
The difference between the income (£12.6 million) and the costs (£5.5million) delivers the Council £7.1 million of investment income that balances the budget.
The surplus generated by the property portfolio has already successfully contributed millions of pounds to support Council spending and is forecast to successfully continue to do so. As well as projecting the £12.6 million surplus for 2023/24, the Council is currently projecting that it would make £12.8 million surplus the following year (2025/26) and £12.9 million the year after (2026/27) and so on into the future. It is designed to be a low-risk and continuous revenue stream to fund Council services.
The property portfolio was built up after taking extensive professional advice and very carefully considering options. The process was managed and overseen by a cross-party committee of councillors, and industry experts on the Council's Investment Board, with additional support from independent expert advisers throughout. The Council deliberately chose to acquire only properties with a very manageable degree of associated risk - and where the payback was healthy but prudent. The Council was not interested in higher levels of payback, as these would have been riskier investments. Through its prudent approach the Council has ended up with an excellent set of seven assets.
There is no underlying problem with the investments that the Council has made, or with any of the tenants. The tenants are all paying their rent, and the finances are a little better than planned for.
In terms of value, the portfolio has grown very substantially in its underlying value. This is a double win for the Council - more income and an increase in value of the underlying asset, and a double indicator of how strong investment decisions have turned out to have been.
The estimated resale value today of the seven assets, if the Council chose to sell them earlier than planned, is several tens-of-million pounds higher than the Council paid for them, even after allowing for associated costs. It would represent a cash windfall.
However the Council's ownership of the properties is specifically not to generate a healthy return on sale. If the Council were to choose or be forced sell all of any of the properties much earlier than planned, it would stop receiving rental income on them - and it is the surplus on that rental income that the Council requires for service delivery in coming years.
Over the last few years there have been a number of changes proposed by Government that have been halted or reduced after consultation and before implementation.
None of these three possible sets of changes require any changes in the law, but instead rely on existing powers that the Government and CIPFA have. If they move forward, it is likely that all the changes would be effective from the next financial year.
There is concern that in trying to limit risky investments made by poorly performing local authorities, the Government would prevent prudent and well run councils, such as Uttlesford District Council, from funding a full set of services. It would be disappointing if these changes prevented good councils from being low-tax, high service authorities - and instead forced a bigger financial burden on tax-payers.
The Council is in close and active conversation and discussion with CIPFA and are responding to their consultation on their new rules, as well as talking directly with Government, including through the local MP who is of course also by coincidence the new Minister for Local Government.
The Council is trying to influence them both into making some possible minor tweaks that would allow them to still discourage local authorities around the country in future from taking out large and risky borrowings, but without having the unintended consequence of forcing local authorities to call an early and abrupt to their existing investments, with the knock-on negative financial consequences to incomes.
So far the discussions have been positive.
The Government is entitled to change and apply the rules in the way they see fit.
Although Uttlesford has a prudent, risk-balanced and healthy portfolio, it is likely that with any rule changes the Council, and all other local authorities, may be forced to take a modified approach to the way they generate income to pay for services.
In response the Council is reviewing scenarios and undertaking contingency planning for different possible financial scenarios and Medium Term Financial Strategies. These will be brought forward for Councillors to consider over the 2022/23 budget cycle.
If cuts might ultimately be needed, including to jobs, isn't it better to stop recruiting into permanent roles now so that staffing establishment stops growing, and thus fewer job losses are needed later?
It's too early to be talking about job cuts as we don't have a clear idea of the scale of the financial challenge, though we can't honestly completely rule this out at some point in the future, such as starting at about this time next year.
Blanket recruitment freezes make some sense but they are an incredibly blunt instrument. If and when we have to reduce our spending - including reducing our spending on staff - we will need to do so with a clear idea of how (and at what level) we would operate our services going forwards to continue to deliver the best quality services we can for local people, so that would mean having the right staff in the right places. Blanket recruitment freezes don't lead to that situation, so we're not going to introduce one, so much as think very hard about filling casual vacancies when they arise, or whether we can begin to manage with a slightly smaller number of staff as colleagues retire or move on to other jobs elsewhere.
For those vacancies we do need to fill over coming months, we'll certainly think about whether we can recruit to fixed term roles rather than permanent jobs, depending on market conditions. We're also going to remain absolutely committed to developing our own staff, particularly building their skills, experience and confidence to step up to more senior roles as their career advances.