Published on Tuesday, 29th December 2015

 

Much to my surprise, I have been attracting a lot of flack over something that I consider among the best things that this administration has done, namely to buy commercial assets. This all seems to be tied in with a belief that somehow the council has lots of money squirreled away somewhere that it could spend. That is not true, but I think I need to explain why because frankly it’s a false debate otherwise: the only way the council could spend millions on the Northern Quarter or a new museum or whatever is through a referendum to substantially increase the council tax. In other words, the only money squirreled away that could be spent on these pet projects is your savings. In reality, we’re not going to have a referendum of course, but that does mean the belt-tightening has to continue.

 

That doesn’t mean that nothing will happen on some of these development aspirations by the way. It does, however, mean they will need support from government – whether via the LEP or the lottery – and they will need market-led financial support from developers. In other words, if they happen it won’t be as council-driven schemes, but as partnerships.

 

There are three points that need to be made. That borrowing without a means of repayment is not an option, that the spending review has not reduced the need to save money and that the council has only limited reserves and it’s using those already.

 

Commercial property and debt repayments

 

The council has now spent about £30m on profit bearing retail and industrial property. The portfolio consists of three large buildings on long leases to solid companies. By taking ownership of these assets, the council will receive the rental payments. In time the council will have to take on borrowing to pay for these properties – it doesn’t have the savings to cover it – but in the short term it will use the City Deal money that is being lent out. That means over £1m in profit initially, dropping to around £400,000 after a new loan is taken out.

 

The City Deal money came with lots of strings attached and it has to be spent on infrastructure in Tipner and Port Solent – it cannot just go into general spending. If the council tried to do so it would be breaking the deal with government and would have to repay the money. The money can effectively be used in the short term, but only until that project ramps up when that money will be spent.

 

To think there is money to be spent on a museum or a road or whatever on the other hand would be a dangerous illusion. You’d still have the borrowing costs with none of the income. To take an example, a Sherlock Holmes museum built from scratch could easily cost £10m and would be unlikely to make a profit. The debt costs on a loan that size would be £800k pa. So you can have a museum, but only by (for example) closing two-thirds of the city’s libraries to pay the debt costs. There is no way of covering this with pain-free savings. Oh, and, by the way, the number of senior officers has been cut from 20 to 14 in the past year, limiting the scope for further savings there and we’re already taking every efficiency saving we can find.

 

 

The spending review

 

In mid-December, the government published the draft Local Government Spending Settlement for 2016/7. There were a number of surprises contained in it - the big ones being the time period being four years instead of the usual one and the Better Care Fund extension later in the plan period.

 

Throughout the last decade at least, the council has planned on a three-year cycle. By estimating the level of savings (or growth) in advance and smoothing out savings, management has time to plan and implement changes.

 

A year ago the estimated savings total for 2016/7, 2017/8 and 2018/9 was put at £31m. After all, that has happened in between that figure still stands. The council's finance head has crunched the numbers and the many changes there have been all cancel each other out, leaving the original savings target intact.

 

There are two important caveats though. The first relates to the National Living Wage. The previous estimate predated the announcement that the minimum wage for those over-25s will rise to at least £9 ph by 2020 and consequently it makes no allowance for it. The council spends millions of pounds on private-sector care homes and domiciliary care home agencies. As all this work is carried out in the private sector, the authority does not set the pay rates, however we are all aware that many of the positions are lowly paid and will be affected by this policy. That is a good thing in many ways, but there is no denying that it will create a huge cost pressure for the council. No-one knows exactly what the impact will be, but it could easily be an additional £1.5m a year for each of the next four years.

 

The government has also decided to effectively increase the council tax referendum limit to 4% for upper tier authorities. InPortsmouth's case that allows the council the option of raising an additional £1.25m a year in revenue, which would cover most of the living wage increase. The choice then comes down to either take the extra money to pay the care workers or to increase the savings target by £6m to close the gap.

 

The other issue is the Better Care Fund, which the government set-up a few years ago to encourage co-operation between local authorities and the NHS. This is to be increased in size but not by any significant amount until 2018/9. The money will be distributed to help the council's with the narrowest tax bases - i.e. those with the lowest valuation houses - and that includesPortsmouth. The city stands to gain £6m by 2019/20 and that means the budget may finally stabilise that year.

 

There are still many unknown details - such as how the Educational Services Grant will be reduced, what will happen to the Independent Living Fund, the Public Health grant, how the tax base will grow and so forth, all of which means the savings target remains subject to change. However we do know that taking £31m out of the budget is going to be extremely challenging. Next year's budget covers the first £11m of that and that was hard to do. Coming up with the rest is going to require profound change in how the council operates and what things it does.

 

On theIsle of Wight the council is openly talking about stripping out all non-statutory services and about the possibility insolvency (see http://www.iwcp.co.uk/news/news/cash-crisis-at-isle-of-wight-council-86550.aspx for example).Portsmouth is in better shape than that, but there is nevertheless no real potential for slowing the rate of savings yet alone taking on new spending.

 

The level of reserves

 

So if borrowing money or ignoring budget reductions are non-starters, what about using reserves? Like all local authorities Portsmouth has multiple reserves most of which are for specific purposes, so there is a City Deal reserve, which can only be used for infrastructure around Port Solent and Tipner, there's a Highways PFI reserve, which is used to smooth out payments to Colas, there are various school reserves consisting of money held by the council on behalf of schools and which only schools can spend. Stripping all those out and we're left with three main areas: portfolio reserves, the Medium Term Resource Strategy (MTRS) reserve and uncommitted reserves. Let's look at each.

 

Portfolio reserves were set up a couple of years ago to incentivise good behaviour by Cabinet Members and senior officers. It consists of any money allocated to a particular portfolio and still unused by the end of the financial year. Cabinet members should then use this money for fairly minor items of expenditure outside of the budget - for example something like £250k of the PRED (Planning, Regeneration and Economic Development) reserve is going to be used on refurbishing Medina House in Cosham so that it can be brought back into use and can achieve a rent. It's the same story with the other portfolios.

 

In total these reserves are worth £5.4m (see http://democracy.portsmouth.gov.uk/documents/s9543/Budget%20Performance%20Monitoring%202nd%20quarter%2003122015%20Cabinet.pdf, section 7), which is down about a million on a year ago. In some instances, this money will be used to smooth the savings profile, such as the previously announced use of the Environment and Community Safety reserve to protect the Domestic Violence service for one year while work progresses on designing a cheaper service. In other instances, it will be used to cover various running costs. That applies to the Port, which has the largest reserve and which is capital intensive - that money will cover some of the investment required.

 

The next reserve is the Medium Term Resource Strategy. I don't have the up to date figures in front of me as I write this, but from memory (and therefore plus or minus a million or two) it has something like £12m in it of which only £2.5m is unallocated. The purpose of this fund is to pay for spend-to-save initiatives, where some upfront investment can generate savings down the line and to cover redundancy costs. The already allocated elements of this are for those purposes, notably for redundancies and £2m+ has been set aside for that in each of the coming three years.

 

The final reserve is the uncommitted reserve, which is the general catch-all for any unplanned expenditure. It currently holds about £15m and the accounting standards preclude it falling below £6.5m - if that were to happen then extra cuts would have to be made in-year to top it up again, after all it would be reckless for the council to have no money available to cope with the unexpected.

 

In April 2012 this account actually held £24.1m, but it’s come down a lot since then as both this administration and its predecessor used some of this money to smooth out the impact of savings. By April 2016 the balance is likely to be about £15.1m, which I should add is £1.5m more than was forecast this April.

 

(the level of uncommitted reserves as estimated in early 2013/late 2012)

However with the savings target in the Spending Review being forward loaded - that is heaviest in 2016/7 - there is likely to be renewed pressure on this reserve (although the short term million-a-year profit from the investment properties will help). While the three-year savings target remains £31m, the £11m saving next year will not close the loss of income from government. In cash terms the combined income from business rates and central funding will fall by £9.7m and with inflationary pressures and unfavourable changes to National Insurance rules a saving of perhaps £14m would be needed to match the drop in available resources. In other words it is quite likely that the committed reserves will fall further.

 

Conclusions

 

There are no pots of free money that can be used on new projects. That's just the truth and people that pretend otherwise either do not understand the numbers or are being deliberately misleading. The good news is that by working with the private sector and maximising specific capital grants from central government, the lottery and so forth that things will happen, but it won't be everything and it won’t all be at once.

 

Tags : Budget