The SIC’s coffers are in robust health despite the worst recession since the Great Depression in the 1930s, prompting its head of finance to suggest laying aside £20 million to spend on tackling the isles’ housing crisis over the next five years.
In a comprehensive report on the state of the council’s reserves and its future budget strategy, Graham Johnston says the SIC is beating its financial targets even though the economic downturn has caused a £6.5 million fall in the income forecast from its stock market investments.
Fears that the council would break its policy of maintaining its oil reserves at a minimum floor of £250 million have not been realised, with the general fund valued at £280 million – £13 million higher than anticipated – at the end of March this year.
The chief reason for that, according to a report by Mr Johnston to go before councillors next Wednesday, is “significant under-spending on most fronts” – most notably £5.7 million less than budgeted for on capital projects and £5.8 million less on supporting the local economy as part of the deal to incorporate Shetland Development Trust and its reserves into the council.
He accepted that the upbeat tone of his findings was probably at odds with that being delivered by most other local authority finance chiefs this year, telling The Shetland Times: “The fact that the recession isn’t biting all that hard in Shetland is maybe one factor [and] the fact we’ve been putting a bit of downward pressure on spending in any event. We face the future in pretty good shape.”
So positive is the financial picture Mr Johnston paints that he is proposing that the housing department should develop plans for additional houses worth up to £20 million over a five-year period.
There is a waiting list of around 900 for houses in Lerwick alone, and the charitable trust’s property arm SLAP recently acquired a large area of land on the Staney Hill with a view to building 200 new homes – a mixture of council houses, Hjaltland Housing properties and private sector developments.
Although the council’s stock market investments have taken a hammering amid the global financial crisis, the balance sheet picture looks much rosier because the reserves are valued at “book value” (the cost at purchase) rather than current market values.
At the end of the financial year in April the reserves were worth £217.4 million, well below the floor, and they have gained only £2 million in the intervening four months. The book value is used for long-term financial planning “because it is not distorted by short-term fluctuations in markets”, the report notes.
Mr Johnston lavishes praise on top officials for tightening their budgets and urges them to continue on that path: “While some under-spending arises from an inability to recruit into some vacancies, and from undesirable delays to some projects, a significant proportion of the under-spending arises from officers restraining spending while doing everything possible to maintain high quality public services.”
The figures were particularly heartening, his report notes, because they incorporated one-off costs of £2.8 million towards meeting single status liabilities and a further £4.3 million was spent on purchasing Islesburgh assets from Shetland Charitable Trust.
An allocated budget of £20 million for capital projects saw only £14.3 million drawn from the reserves, largely due to delays “across the board” and also thanks to an additional £2.4 million from a new Scottish Government capital budget.
Mr Johnston is also recommending that the council abandons a move towards reducing the size of its capital project budget from £20 million to £15 million a year, instead looking at a five-year budget of £100 million.
Although the council has traditionally underspent its capital budget, under new chief executive David Clark a “solid and achievable” five-year programme is being drawn up and it is hoped that spending will be much more closely aligned with budgets than in the past.
Big areas of revenue underspend in 2008/9, meanwhile, included community care, children’s services and education, which are put down chiefly to staff turnover, recruitment delays and vacancy levels. “Despite these challenges the indications are that managers and staff managed to maintain good service delivery throughout the year.”
An expected £4 million contribution to the pension fund to meet the cost of absorbing Shetland Towage employees into the scheme did not materialise last year, though it is estimated that the price tag will now be some £8.3 million this year.
Mr Johnston does sound a note of caution, however, over the challenge of funding the implementation of single status – which will add an annual £4 million to the local authority’s wage bill, as well as a further one-off cost of £6 million in 2009/10. There is also the prospect of a “much less favourable” settlement from the Scottish Government from 2010/11 onwards.
Another significant challenge will be finding means of funding the estimated £50 million new Anderson High School. When the school is eventually built, it is expected that it will be sold to the charitable trust and then leased back at an approximate cost to the council of £4.5 million a year, though the trust has not agreed to any deal at this stage amid ongoing discussions.
One-off costs – including the hefty contribution to the pension fund – will leave the oil reserves precariously close to the floor policy level, which “limits future room for manoeuvre within the financial policy framework”, but Mr Johnston is recommending that the £250 million floor remain in place.
He said it was impossible to predict the precise details of future grant packages from Holyrood and in the meantime he feels the best policy is to base spending plans on creating stability in the local economy.
“I feel we’re in significantly good shape to face the challenges of the future that until the facts become known, stability is the best way we can go given the financial circumstances that we’re in. We may well have to adjust our costs when the subsequent settlement is known but it’s essentially unpredictable at the moment.”
Asked whether he thought the continuing pattern of underspending suggested that departmental budgets were simply being set far too high in the first place, Mr Johnston said there was a “genuine challenge” ahead of setting next year’s budget to “work closely with the heads of department and executive team to get that kind of thing squeezed out of the system”.