How serious are financial challenges facing BCP Council

Following the collapse of the beach hut sell off plan to provide around £50million towards the transformation programme, the council has asked the government if it can borrow £76million.

A report ahead of a special scrutiny committee meeting on Friday, September 2, and cabinet on Wednesday, September 7.

The paper by Adam Richens, the council's chief finance officer, said the unitary authoriy which was only former in 2019 was now operating in a “highly challenging environment”.

Mr Richens has outlined a series of measures required to steady the ship in the coming months and work towards creating a balanced budget for 2023/24.

How did the council get to the current position?

BCP Council members voted by a majority to approve the Conservative administration's 2022/23 budget in February of this year.

The budget was underpinned by the creation and use of a special purchase vehicle (SPV) - a wholly or majority owned council company - to buy thousands of beach huts owned by the local authority.

The sum from this transcation, which the company would have borrowed from the council, was set to be used for the ongoing transformation programme through the government's flexible use of capital receipts (FUCR) regulation.

At the time of setting the budget it wasn't even known if FUCR would be extended into the current financial year, although it subsequently was so it appeared it was all things go on the things on the beach hut SPV.

From an early stage there were concerns from opposition councillors, residents and even Conservative MP Sir Christopher Chope.

Council leader Cllr Drew Mellor repeatedly said the plan was in line with the rules of the FUCR regulation and there had been positive dialogue with government.

It has since come to light that minister Kemi Badenoch wrote to Cllr Mellor in mid-June to express potential issues with whether the local authority's plan was in line with the rules.

A subsequent evaluation was carried out by the Department of Levelling Up, Communities and Local Government, with levelling up minister Greg Clark changing the regulation and in doing so preventing the beach hut SPV from being able to fund transformation.

This decision was confirmed at the start of August and the council has now had to work quickly to come up with a solution to the funding gap it faces for both the current financial year and the two years that follow.

What are the current financial challenges?

It is difficult to fully predict what the current financial situation means for the council and residents, but the report from the local authority’s chief finance officer does not paint a pretty picture.

The scrapping of the beach hut SPV has left a huge whole in the current budget and created issues with the funding of the ongoing transformation programme which is expected to deliver recurring efficiency savings of £51million a year to be delivered in the next three years, having already delivered £48million a year.

Mr Richens’ report said any of the scenarios presented leave a “material funding gap in the revenue budget for 2023/24.

“As a Council we have little financial resilience as the reserves are low and there is little room to manoeuvre,” the report said.

“Risk has now crystallised around the beach hut income securitisation, and we are now seeking a capitalisation direction as an option to fund the transformation programme, which in itself carries risk and may come with constraints.”

Other financial pressures include ongoung pressures in children's services mainly due to higher than expected levesl of agency staff, budget savings in children's services and housing which it is assumed will not be delivered now in part or full, additional cost of living inflation and an outstanding £1.6million of transformation programme savings to be captured in 2022/23 and net pressures on operations linked to energy costs.

What has council done to address situation so far?

Around the time that the collapse of the beach hut sell off came to the fore, it was confirmed the council had asked the government for a capitalisation direction.

It was subsequently confirmed that an application under the exceptional financial support process had asked for £76million over three years, including £20million in the current year, to mainly fund transformation.

The council has reportedly been discussing the option to borrow in this way using public works loan board since 2019 but without encouragement. The capitalisation direction comes with a warning that it is an application and not a right, and there are likely to be constraints and restrictions imposed by government.

If approved in full, £20million of borrowing would be used in 2022/23, £27.9million would be used in 2023/24 and £28 million would be used in 2024/25.

What does this mean for the current financial year’s budget?

Mr Richens’s report sets out the financial positions both with and without an approved capitalisation direction.

The £20million would balance the loss of capital receipts from the sale of the beach huts not going ahead. The council would also need to drawdown £1.459million on earmarked reserves which were previously allocated to regeneration and not currently committed, as well as £638,000 of the financial resilience earmarked reservices which was previously being used to support additional cost of living cost pressures in 2023/24.

The scenario if the borrowing is not allowed is somewhat more challenging. This assumption is restricted to using that formally approved in the 2022/23 budget and therefore not going ahead with erxtra investment in adults and children’s services transformation projects.

This leaves £16million to be found, which could be achieved by the drawdown on the same £1.459million of earmarked reserves, using all of the financial resilience earmarked reserved due to be to support extra cost of living pressures in 2023/24 (£14.828million) and using 8.6 per cent of the council unearmarked reserves (£1.374million).

The report says this scenario could be subject to a permutation if the council brings forward a schedule of capital receipts from the sale of assets to fund transformation. This would fund transformation rather than using reserves. Cllr Mellor has repeatedly said he does not want his administration to sell assets.

Mr Richens warns that while both options balance the financial position in 2022/23, there is a “significant cost to the reserves going forward into 2023/24” without the capitalisation direction.

Future years...

It looks almost certain that residents will face a Council Tax increase in 2023/24 and by the full amount based on current officer forecasts as well as an increase in fees and charges for all services.

At present there is a net funding gap for the next financial year of £33.9million in the latest medium-term financial plan.

Mr Richens said the council now has “first-hand experience of Government’s reaction where proposals are not consistent with the spirit and intent of the legislative framework”.

Therefore he warns that the local authority should plan for the possibility that proposals to generate addition revenue receipts from new commercial models will prove “imprudent or non-compliant”.

It has been suggested to councillors that it would be sensible to consider as a matter of urgency what alternative measures can be introduced at pace to balance next year’s budget.

What has been recommended to councillors?

The report from Mr Richens outlines a raft of recommendations to cabinet:

• Brings forward to the September 28 cabinet meeting proposals to prudently position the council to deliver a balanced budget for 2023/24 from traditional local government financial management processes and revenue sources.
• Agree to bring forward a capital receipts schedule for additional, non-strategic, asset sales that could be used as an alternative method of financing the Council’s Transformation Investment Programme via the FUCR.
• Agree to explore options across the council to deliver revenue through further commercialisation and a review of fees and charges as a response to the cost-of-living crisis.
• Request the corporate directors and portfolio holders for children’s services, transformation, and operations to bring forward papers outlining
  a) in-year service pressures and the mitigation strategy that will be put in place to manage them
  b) the timeline for the increase in costs for the transformation programme and provide an update on the delivery of 2022/23 budgeted and future years savings.
• Agree to place an update on the financial strategy as a standing cabinet agenda item until such time as there is a balanced budget delivered for 2023/24.
• Agrees that no new financial commitments will be made until such time as there is a balanced budget for 2023/24 other than with the specific agreement of the chief finance officer in consultation with the portfolio holder for finance.

When will the financial situation be discussed?

A special meeting of the corporate and community overview and scrutiny committee from 6pm on Friday, September 2. First there will be a continuation of an adjourned meeting from July focusing purely on the SPV proposal, following the publication of KPMG consultation reports and the collapse of the plan. The committee will then look at Mr Richens’s financial update report.

Cabinet will then meet on Wednesday, September 7, to discuss what immediate actions will be taken, including whether to approve the recommendations from the financial update report.

Full council meets the following week on Tuesday, September 13, when the matters are likely to be discussed heavily before another cabinet meeting on Wednesday, September 28, will provide further updates on the fast moving situation.

It is expected that the decision from government, which will involve the Treasury, on the  council’s capitalisation direction application will not be provided for several months.