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Strategic Financial PlanningExperience of Shetland Islands Council
www.pwc.co.uk/ni
CIPFA Northern Ireland Annual Conference
8 October 2015
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Areas to Cover
PwC 2
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)
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Context
PwC 3
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ContextShetland Islands
Council
PwC 4
• 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”
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Comments
PwC 5
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
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• 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
PwC 6
Source: SIC MTFP 2014-2019
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Developing a Framework for stability
Medium Term Financial Plan
PwC 7
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Why develop a Medium Term Financial Planning approach?
PwC 8
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.
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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
PwC 9
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
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Lack of clarity over the size of the problem
PwC 10
Extract from SIC MTFP 2012-17
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No Strategic Direction/Priorities
PwC 11
• 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
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No budget targets for budget responsible officers
PwC 12
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
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Organisational Culture
PwC 13
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
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Executing the Plan
PwC 14
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Developing the budget – Effective budgeting
PwC 15
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
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2015-16 SIC Revenue Budget
PwC 16
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At a crossroads
PwC 17
Source: Audit Scotland, September 2015
Source: Shetland Times, December 2014
Financial Sustainability is a journey, not a destination.
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Building for the future
Long Term Financial Plan
PwC 18
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Objectives of a Long Term Financial Plan
PwC 19
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
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Approach
PwC 20
An Overview of Local Government in Scotland, Audit Scotland, March 2015
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If no pro-active action taken to address underlying financial challenges the Council runs out of reserves in 2029.
PwC 21
Scenario Planning
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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
PwC 22
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Scenario Planning
PwC 23
A model for a sustainable future where reserves are maintained for future generations
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The impact of maintaining the level of infrastructure required to deliver services in their current format; £9m per year less for revenue expenditure
PwC 24
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Final thoughts
PwC 25
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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
PwC 26
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Thank you
Questions?
PwC 27
© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
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cipfa.org.uk
Future of Social Housing in Northern Ireland
Cameron WattNorthern Ireland Federation
of Housing Association
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Lunch followed by Workshops
13.00 to 14.00
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cipfa.org.uk
Northern Ireland’s Balance Sheet Uncovered
Alan BerminghamCIPFA
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Refreshment break and exhibition
15.30 to 15.50