To consider report CFO/058/20 of the Treasurer, concerning the financial position, revenue and capital, for the Authority for 2020/21.  The Authority receives regular comprehensive financial reviews during the year which provide a full health check on the Authority’s finances. This report covers the period July to September 2020.

 

Members considered Report CFO/058/20 of the Treasurer, concerning the financial position, revenue and capital, for the Authority for 2020/21.  The Authority receives regular comprehensive financial reviews during the year which provide a full health check on the Authority’s finances.

 

Members were informed that this report covers the period July to September 2020 and covers the revenue & capital budgets, reserves, and treasury management updates.

 

Members were advised that the revenue position is covered in paragraphs 6 to 13 of the report. They were informed that paragraph 7 outlines the budget movements in the second quarter; and as all of the adjustments are self-balancing and have been budgeted for, they have not impacted on the approved net budget requirement, whichremains at £61.961m.

 

They were advised that paragraph 9 reviews the robustness of the approved key budget assumptions and in particular;

 

o   The McCloud remedy assumption that the cost to the employer of allowing Firefighter Pension Scheme members access to their legacy schemes would be considered as part of the 2020 FPS actuarial review and reflected in Employer rates from 2023/24. 

 

o   The financial impact of COVID-19 on the Authority can be contained within the Government funding received by the Authority.

Members were informed that the current position is that these assumptions remain robust and all costs can be contained within the approved budget.

 

Paragraphs 10 to 12 were then highlighted to Members, which summarise the latest forecast revenue position. They were informed that after reviewing income and expenditure, officers have identified the following favourable variances;

o   £125k savings from the firefighter employee budget, as a result of retirement numbers being slightly ahead of the expected forecast.

 

o   £225k savings from the non-firefighter employee budget, as a result of staff vacancies arising from staff turnover in the year and staff not being at the top of their substantive grade.

 

o   £157K savings from the LGPS pension budget as a result of a refund due to the MFRS account being in surplus at the last actuarial review.

 

 

o   £100k savings from the other employee costs budget as staff training and subsistence expenditure has reducedas conferences, courses and other training was postponed or held on-line due to COVID19 restrictions.

 

o   Overachievement of approved support savings and other technical adjustments have resulted in additional permanent savings of £515k with a further one-off savings of £45k.

 

 

o   A forecast favourable variance of £3.069m on the revenue costs associated with servicing capital expenditure funded via borrowing, which ispossible due to:

§  The deferral of new borrowing by utilising internal cash (mainly monies held in reserves and unapplied grants) resulting in a saving on expected debt interest payments, and

§  The Authority making significant additional voluntary MRP payments in recent years, and making only the minimum statutory MRP payment this year, to free up some of the MRP provision.

§  Together this will deliver a £3.069m favourable variance against the £6.3m budget.  

 

o   The Authority has received £104k of additional specific grant to cover compensation for the Government’s small business rate relief.

 

o   A saving of £100k has been identified from the contingency provision for price increases as some inflationary pressures have been contained within the base budget.

 

Members were advised that overall, as outlined in the table on page 51, a favourable variance of £4.440m has been identified.

Members attention was drawn to paragraph 12 of the report, which explains that at the Authority meeting on 15 October 2020, Members supported the proposal of the Chief Fire Officer, to look at building a new Training and Development Academy, at a cost of up to £25m, subject to a further report confirming costs and funding. They were informed that in the last financial review report, Members approved that any future additional savings in 2020/21, be used to increase the capital investment reserve in order to contribute towards the cost of a new TDA development.Members were therefore advised that they are asked to approve the use of the £4.440m favourable variance to increase the capital / TDA reserve.

With regards to the Capital position, Members attention was drawn to paragraph 15, which outlines a small increase of £14k in the capital programme due to an increase in ICT hardware expenditure.

 

 

The Reserves position, as outlined inparagraph 17, was then highlighted, which states that in quarter 2, a net contribution of £0.112m was made to reserves due to;

o   a requirement to reimburse the energy saving reserve from energy saving that have materialised following investment in energy efficiency schemes funded from this reserve, and

o   a contribution to the PFI annuity reserves to ensure sufficient funding exists in the reserve to smooth out the revenue budget contribution to the unitary charge over the life of the PFI initiative.

 

Members were informed that following a review of the current reserves, the report proposes to re-align some reserves to increase the capital / TDA reserve in light of the proposal for a new TDA. They were advised that the report identifies that £0.5m from the recruitment reserve and £0.2m from the inflation reserve can be transferred into the capital reserve.

 

Members attention was then drawn to the Treasury Management performance, outlined in paragraphs 18 to 23.

Members were informed of the following:

 

·         The performance of Treasury management was consistent with the approved treasury management strategy for 2020/21.

 

·         At the end of September 2020 the Authority held £48.2m of investments, a breakdown of which is contained in the table after paragraph 21. All investments are consistent with the approved investment strategy and within the limits outlined in paragraph 21.

 

·         No new loans have been taken out.

 

Members made reference to the ongoing discussions with the Home Office around the use of capital and reserves. It was stated that it has been pointed out numerous times, that unlike other local authorities and the Police who receive a capital grant, MFRA do not. Therefore, the only way to fund the replacement of fire appliances and the build of new stations etc…, is by saving revenue. Members stated that they will continue to make this point when advised to utilise reserves and capital to fund the likes of pay increases.

 

Clarification was sought by Members around the debt repayment strategy and capital financing; and any long-term impact.

 

Members were advised that we have a statutory requirement to make provision for a minimum repayment of debt, which will not be impacted, therefore we will not be going against any regulations or directions.

They were informed that a few years ago, the decision was made to utilise any savings identified in those years, to make additional provision for future debt repayment. This enabled us to free up over a fixed period of time, some of the £6.3m budget for servicing debt, which will be used in the medium term to cover future capital investments. Members were assured that this was a planned strategy, therefore there is no risk of creating a problem for the future.

 

Members were provided with a specific example around ICT, to highlight this strategy. They were advised that the asset life of ICT is 5 years, with the Authority investing in ICT every year. Therefore, each year investment is made in ICT, there is a requirement to create an MRP, to re-pay that ICT over the next 5 years. Members were informed that some savings from the previous year, were utilised to pay for the full ICT investment in one year, which has meant that the MRP to pay off the investment over the next 5 years, is not required. However, it was highlighted that this will be required again in year 6, when the ICT requires replacement, creating a window of opportunity to utilise the MRP reduction for other means. 

Members were advised that previously, this had been used to pay additional MRP, as the strategy was to either deliver a short-term resource to meet a financial challenge, or to fund investment in infrastructure. They were informed that as the TDA development proposals are investment in infrastructure, it is now proposed to build up the reserves, to fund a significant proportion of the proposed build from specific resources, rather than having to borrow the full amount, which would be a significant commitment. They were advised that this strategy makes the TDA development more affordable and sustainable as a proposal, when brought back to Members for consideration.

 

Members made reference to the capital expenditure included around a security update for Windows 7; and queried why the Authority are continuing to pay for a system that is obsolete and no longer supported. They also queried if there are any critical systems in place which still use Windows 7.

 

Members attention was drawn to the Microsoft EA Agreement, reference within the report. They were advised that under this agreement, MFRA are entitled to utilise the latest Microsoft software available; and it was confirmed that we are currently in the process of finalising the move over to Windows 10.

Members were informed that the £12k referenced within the report, is only included for 2021 and is required as there were a few applications that until upgraded, would not work on Windows 10. Therefore, the £12k provision, is required for delays in transitioning to Windows 10, when the application is delaying that process.

Members were assured that this has now been resolved and therefore the risk no longer exists.

 

Questions were raised by Members around the investment strategy, with some concern raised around the level of investment in other local authorities, which exceeds the amount of investment in AAA rated companies, given the precarious financial position of some local authorities. Members therefore, sought some assurance regarding the security of the Authority’s investments.

 

Officers stated that they fully understand Members concerns, given the recent high profile examples of local authorities getting into financial difficulties. However, they were assured that it is highly unlikely that a local authority would ever become bankrupt, as the Government would send in commissioners to identify revenue savings to bring the budget back on balance, which would not put at risk the repayment of this debt, which would always be fully paid.

Members were also assured that the Authority’s strategy places security as the highest criteria, ahead of liquidity and yield.

 

A further question was raised around the McCloud judgement and utilisation of the Smoothing Reserve; and if there was a more exact figure, or overall estimate using actuarial tables, for the entire length of the impact of the McCloud judgement.

 

Members were informed that with regards to the McCloud judgement, there is the issue to consider around the implications of individuals reverting back into their legacy scheme, particularly the 1992 FPS, in which the employer contributions rates are significantly higher. Therefore, the Authority would be required to make a significant increase in contributions into the pension scheme account, potentially back to 2015.

However, Members were informed that in this regard, there had been a clear indication from Home Office, that the assessed liability would be built into the new rates from 2023/24. They were advised that when budget planning from 2021/22 and beyond, there would be a requirement to factor in a provision of around £1m from 2023/24, on the basis of a 3% increase in employer rates, to cover that liability. However, Members were advised that this was still an estimate at present.

 

Members were also informed that the £2m smoothing reserve was to cover two things. They were advised that at one point, there was concern that the Home Office had issued informal guidance, stating that anyone approaching retirement, could have immediate access to their legacy scheme, also that it was indicated that the employer would have to make good the contributions.

Members were advised that that position has now changed in terms of employer contributions, with the Home Office indicating that it will be factored into the actuarial review.

They were advised that in terms of acting on the informal guidance, the Authority had signed up with the LGA and other FRA’s, to seek clarification, as the document lacks a lot of detail required, should the Authority offer firefighters early access to legacy schemes.

It was confirmed to Members that it is unlikely that the smoothing reserve would be required, to make good outstanding or arrears employer contributions, however the issue around compensation payments, that individuals will be entitled to, is still unclear.  Members were informed that the Home Office have advised that compensation payments cannot be charged to the pension accounts; and Authorities must make good and fund those payments. However, at this point, Members were advised that there has been no indication of what a generic compensation payment would be, for any individual claims for financial loss.

Members were advised that it was felt that £2m would be sufficient to meet any compensation payments identified, however officers would be surprised if any are identified and ratified before the end of this year.

 

Members were also informed that the Government are still considering the outcome of the consultation on the draft McCloud remedy; and it is unlikely that there will be any further information around this until the new year at the earliest. They were advised that primary legislation may also be required in order to implement any final remedy, in which case it may be 2022/23 before the Authority is in a position where it knows what the final remedy is and what the proposal is for compensating individuals.

 

Members were assured that although officers are not in a position to provide an exact figure around the McCloud judgement impact, it is hoped that the £2m Smoothing Reserve, should be sufficient to cover any compensation payments. 

 

In terms of the Local Government Pension Scheme, Members were informed that the employer was given to options in the 2019 actuarial review, to either pay employer rates without McCloud built in, or to pay the employer rate with an assumed implication of McCloud. Members were informed that the Authority chose the latter, therefore the employer rate for the LGPS from 2020/21, includes an element for McCloud. They were also informed that approximately one third of staff are in the LGPS, for which there is not expected to be in further increase in employer rates. 

 

Members Resolved that:

 

a)    The contents of the report be noted;

 

b)    The revenue, capital and reserve adjustments outlined in the report, be approved.

 

c)    The increase in the capital / TDA reserve of £4.440m funded from the favourable variance outlined in the report, be approved.

 

 

d)    The Treasurer be instructed to continue to work with managers to maximise savings in 2020/21.