Strategic Financial PlanningExperience of Shetland Islands Council

www.pwc.co.uk/ni

CIPFA Northern Ireland Annual Conference

8 October 2015

Areas to Cover

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Introduction

Context – Council, Regulators, Scale of Challenge

Developing a Framework for stability (Medium Term Financial Plan)

Executing the “Plan”

Building for the Future (Long Term Financial Plan)

Final thoughts

Questions (and answers)

Context

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ContextShetland Islands

Council

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• Remote, rural community of 23,000 people

• SIC is responsible for most public services on the islands

• Largest employer in Shetland with 3000 FTE and turnover of £200 million in 2012

• Net assets of £500 million including £200m usable reserves.

• Highest public service unit costs in Scotland

• 22 Independent Councillors effectively “power sharing”

Comments

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There are significant weaknesses in the way in which the council currently manages its finances. It is essential that the council takes action to improve on this.” Chair of Accounts Commission for Scotland, August 2010

“With current levels of draws on reserves, there is a significant risk that the council's reserves will be fully used in a short period of time if expenditure levels continue to exceed income.” Controller of Audit, Audit Scotland, October 2011

“If we don’t demonstrate that we’re capable of running the council sustainably, then there is no doubt that it will be taken out of our hands one way or another,” Malcolm Bell Convener of the Council, July 2012 “When this Council first met in 2012 it seemed an almost

impossible task to bring our spending down to affordable levels” Gary Robinson – Leader of Shetland Islands Council, December 2014

• Value of reserves: £200m

• 60% reduction in value in 12 years

• Total deficit in 2011-12 of £36 million funded from reserves

• £31m of which related to recurring revenue spending

• Cost pressures and grant reduction forecast budget gap of £44 million by 2017

• Council’s reserve forecast to drop to zero in 2017

• Therefore Council would be unable to meet financial commitments by 2017

Context – Financial Position of Shetland Islands Council year ended 31 March 2012

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Source: SIC MTFP 2014-2019

Developing a Framework for stability

Medium Term Financial Plan

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Why develop a Medium Term Financial Planning approach?

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Flat rate savings targets across the Board

Corporate Wide savings targets e.g. Procurement

The Council had tried everything it could think of to reduce spending…

Creation of an internal Future Finance Team

Inclusion of savings requirement in annual budget (but not identifiable savings)

Introduced constraint to capital expenditure reducing 5 year spending plans from £100m to £75m

Rationalising management team, introducing ER/VR scheme and implementing vacancy control

Initiatives such as removing tea/coffee, introducing cheap non-dyed paper …but the budget gap continued to

increase.

The problem was not overspending and being financially unsustainable, it was a symptom of the underlying problem.

The first stage of developing a MTFP was to understand the problems behind the financial problem.

Identifying and articulating the route cause of the problem

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Organisational Culture

No strategic direction/priorities

Poor under-standing of

financial managemen

tNo budget targets for

budget holders

Poorly controlled and ineffective

budgeting

Lack of clarity over the size of

the problem

No under-standing of

revenue consequences of capital

Lack of clarity over the size of the problem

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Extract from SIC MTFP 2012-17

No Strategic Direction/Priorities

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• Development of a Corporate Plan clearly prioritising services

• Reflecting those priorities in the allocation of the budget “pie”

• Recognition that even protected services will be required to make savings

• Clearly understood that allocations subject to change based on savings consequences

Extract from SIC MTFP 2012-17

No budget targets for budget responsible officers

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Source: SIC MTFP 2012-17

• All directors given Target Operating budgets 5 years ahead.

• Certainty given over amounts to allow confidence in planning

Benefits:

• Certainty and accountability

• Nowhere to hide

• Sets out budget – not savings requirement

• Can take a longer term view encouraging a strategic approach rather than annual salami slicing

• A plan to unite behind

Organisational Culture

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Directors avoiding offering up savings and waiting for others to meet the budget gap

One-year salami slicing approach to budgeting – rolling forward prior year and reducing operating budgets

Uncontrolled cost pressure allowances negating the impact of savings

Directors proposing unpalatable savings with the intention of them being rejected by Councillors

Innovation hampered by the initial costs/effort involved in making the change happen

Year end spending spike each March as a justification for budget holders to request the same level of resources the following year

Executing the Plan

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Developing the budget – Effective budgeting

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Delivering the

financialplan

Year 1 – ZBB all directorates

Subsequent years 5 year directorate rotation of ZBB

Activity based approach

Challenge from finance on budget officer proposals

Re-designing care services

Ferries timetables and vessel changes

Blueprint for Secondary Education

Stripping out higher risk budgets – fuel, winter roads maintenance, supply teachers

Reducing central risk budget corporately

Closely managing cost pressures to avoid budget growth

Benefitting from the savings made

5 year Asset Investment Plan aligned to priorities

Revenue consequences built into revenue budget

Focus on capital projects that deliver revenue savings

2015-16 SIC Revenue Budget

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At a crossroads

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Source: Audit Scotland, September 2015

Source: Shetland Times, December 2014

Financial Sustainability is a journey, not a destination.

Building for the future

Long Term Financial Plan

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Objectives of a Long Term Financial Plan

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Understanding probable impacts that current trends and decision-making will have on the financial health of the organisation in the years to come.

Demographic Change

Financial Modelling based on demographic information.

Impact of pension schemes

Recognising the cost of pensions and forecasting future impact.

Capital Expenditure Requirements

Understanding the asset base, and plan to maintain it.

Promote constraint in service growth

Understanding the long term financial impact of decisions taken now

Approach

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An Overview of Local Government in Scotland, Audit Scotland, March 2015

If no pro-active action taken to address underlying financial challenges the Council runs out of reserves in 2029.

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Scenario Planning

Baseline Capital Expenditure Required to continue service provision in its current form, and estimated shortfall

Annual (average) Expenditure £000s

Ferries and Terminals Replacement £3,857

Building Replacement Programme £3,000

Roads £4,502

Building Maintenance (Lifecycle Costs) £2,068

Ferries Maintenance £1,236

Vehicles £1,200

ICT Hardware and Public Sector Network £676

Scord Quarry £175

Energy Recovery Plant £450

Estimated annual expenditure to maintain existing asset base £17,164

   

Available Resources  

Capital Grant £6,000

Capital Receipts (from sale of assets) £250

Total core capital income £6,250

   

Annual Shortfall to be borrowed £10,914

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Scenario Planning

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A model for a sustainable future where reserves are maintained for future generations

The impact of maintaining the level of infrastructure required to deliver services in their current format; £9m per year less for revenue expenditure

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Final thoughts

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The principles aren’t complicated and this is common sense, but that’s not a reason for doing it

Clearly documented financial planning, which is understood across the organisation, is essential to deliver necessary savings

Financial Plans are an effective tool to manage behaviours and change cultures

Financial Plans need to be aligned to Corporate Plans

Financial Planning doesn’t deliver financial sustainability…but financial sustainability cannot be delivered without effective financial planning

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Thank you

Questions?

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