Restoring council solvency is much more important than reputations

“This island is almost made of coal and surrounded by fish. Only an organising genius could pro­duce a shortage of coal and fish in Great Britain at the same time.” Aneurin Bevan MP, founder of the NHS, 24th May 1945.

Sixty-six years after Nye Bevan brought the house down at a Labour Party conference with that famous crack about a Tory minister, an outsider contemplating Shetland Islands Council’s financial crisis might be forgiven for being similar­ly incredulous: how on earth did Britain’s “richest local authority” get into such a mess? Were govern­ment cuts to blame? Hardly: the expected reduction in next year’s subsidy from the Scottish govern­ment accounts for only about a fifth of the current SIC deficit, originally estimated at £26 million for the financial year 2011-12. That means most of this unsustainable over­spend is entirely home-made – a DIY disaster.

The paradox is that Shetland is still very wealthy, as far as its reserves of capital are concerned. In the SIC Capital Fund, which can only be used to build or buy new stuff (like a new Anderson High School, new Eric Gray Centre or a Whalsay tunnel), there was £84.3m on 4th November. The Repairs & Renewals Fund, used for fixing or replacing worn or broken stuff (like snowploughs, obsolete computers and yellow vans), was worth £53.3m on the same date. That’s an impressive total in the community piggy bank of £137.6m – over £6,100 for every man, woman and bairn in the islands.

Then there’s the Harbour Reserve Fund. This only exists because in 1974 the old Zetland County Council got a private Act of Parliament through Westminster, thanks largely to the efforts of some far-sighted councillors and one Ian R Clark, then general manager of “Da Coonty”, with more than a little help from the Labour MPs Gavin Strang and Eric Varley. The ZCC Act empowered the council to hold harbour profits in reserve – mainly to make good any future deficit on the Sullom Voe harbour operations but also, meanwhile, to fund economic development pro­jects and anything else which, in the opinion of the council, benefited “the inhabitants of the Shetland islands”. This is our sole legal authority for bailing out the coun­cil’s recurrent deficit on its annual current account, or “revenue spending” budget. The Harbour Reserve Fund is the envy (and that is the right word) of every other council in Scotland. Companies can run at a loss, for a while, but the law doesn’t allow council accounts to show a deficit. Councillors are ultimately responsible and our books must balance, always, or else the government can and will send fierce women in suits to do it for us, as they did in Aberdeen, not so long ago. So it’s important to remember Shetland Islands Council can only cover the annual deficit, or loss, using the powers of ZCC Act to operate a Harbour Reserve Fund. Some people forgot this for a long time.

What’s supposed to happen is that we invest the Harbour Reserve Fund in stocks and shares and then use the interest and dividend income to bridge the gap between what the SIC spends each year and what we raise from council tax, government grant and the charges we make for council services.

At present there’s £47.8m in the Harbour Reserve Fund. Add this to the money in the Capital Fund, Repairs & Renewals Fund and various smaller funds reserved for particular purposes, and you get a total of £196m, or you did on 4th November. It might be more or less next week, depending on global stock market reaction to the latest episode in that long-running Euro-soap “I Fear the Greeks, Even When Looking Gift Horses in the Mouth”.

At the recent public meetings to tell voters the “bare facts” about the financial crisis, we heard that the council’s new chief executive and his senior staff have so far found ways of saving about £9m this year, of which more than two thirds is in permanent, rather than one-off, economies. This is quite an achieve­ment when you look back at the failed attempts at savings over the past decade, but it’s not enough: we still face the next financial year with a real deficit of at least £18m and probably £20m. In other words, we’re over budget by about 20 per cent.

The council’s leaders deliber-ately went into the consultation sessions with a blank slate, rather than present­ing the public with their own considered opinion on a range of possible options (for example, perhaps cutting down on community care, bus services and ferry sailings, amalgamating small schools, and/or selling off property). My colleague Gussie Angus is right to describe this as “a political vacuum”. Without giving voters full details of the possible extent of the financial crisis, they just asked them for ideas on how to save money. This was cheaper than hiring more consultants, a cynic might say, and indeed the public proved to have some very good ideas, many of which councillors had already considered and rejected last year before all of them appreciated the full extent of the financial crisis.

At these meetings, the political leader had placards and leaflets showing the value of the council’s “reserves”. The figure displayed was not the latest real total of £196m but £249.9m, tapering off to £219m by March 2012. How come? Well, £249.9m is what the reserves were worth in March this year. The auditors tell the council to draw up its budgets using the figure at the end of the financial year. Of course, the market value of the reserves goes up and down, so we always take a long-term view and make reasonable assumptions about what the markets are likely to do, averaged over three years. Usually our expert advisers get this right but the current financial chaos means those usual assumptions may be wrong. The real value of the council’s funds has slumped by some 20 per cent in the past seven months, after all. Few seriously expect the markets to recover by the time we draw up our next accounts in March 2012. So the financial position may well be considerably worse than forecast. It would be prudent to expect, and plan for, the worst.

We could weather even this unprecedented financial hurricane if our books balanced, but they don’t. Although we still have a lot of capital in the deposit accounts to build and buy some things, and a lot of cash to repair and renew Da Coonty’s trucks, ferries, roads etc, we don’t have anything like enough in the current account to pay all the people we’re employing. A £20m deficit is roughly what it costs to employ 588 people, at an average of (say) £34,000 for each “full time equivalent” post. That’s the cost to the council, not the average SIC wage, by the way.

For a decade the council has bridged this gap between income and expenditure by using “reserves”. There’s nothing wrong with that, as long as you’re only using the income from the funds invested in the stock markets, government bonds and property, etc. It’s a bit like a newly retired person with a lump sum: he can either blow it all on fun stuff now or invest it in an annuity to bring in a little extra income each year. The annuity principle was central to the “rainy day” philosophy of the council leaders who founded Shetland’s current prosperity, almost 40 years ago. The late conveners A I Tulloch and Edward Thomason never imagined their successors would blow the capital in the reserves on subsidising annual deficits. Their idea, and Ian R Clark’s, was that Shetland’s extra funds, if sensibly invested, would produce regular income to shelter us from financial cloudbursts when the oil industry was on the wane. They also surely believed that prudent councillors would always ensure the real value of the funds kept pace with inflation, at the very least, even if this policy meant restraining their spending in some years. For six or seven years after 2003, such restraint was largely absent. The council hired hundreds more staff, each and every one of them no doubt useful and necessary; but not all of them affordable, as it turns out.

At present the estimated income from our investments (at 4th November 2011 fund values and assuming – rather optimistically – a 5.75 per cent return) is some £10.7m a year from the three main funds (Capital, Repairs & Renewals and Harbour Reserve), plus any grants we can get from government agencies on “The Big Island” and Brussels. There’s another £715,000 in income from the smaller funds but that’s all spoken for and need not concern us here.

For the past 10 years the SIC has increasingly been dipping into its lump sum and living beyond its means. Some have called this “eating the seed corn”. To me it’s more like selling off the topsoil. In 2008, when Cllr Gussie Angus warned about the escalating crisis and suggested a freeze on recruit­ment, he was accused of a “knee jerk reaction” (a reflex insult we often hear from the oratorically challenged).

Every time we take £100 out of the reserves we find we have £5.75p less to spend next year from the income that the £100 would other­wise have earned. The political leadership of the council has repeatedly ignored this simple fact, familiar to any primary school pupil who pays attention during arith­metic lessons (or whatever they have nowadays). The £10.7m in earnings from all “reserves”, the average P7 class would notice, covers only just over half of this year’s £20m deficit. But, alas, the problem is even worse because, as councillors learned to their conster­nation at a private “seminar” on 8th June this year, most of the reserves (and the income from them) cannot legally be used to subsidise a deficit on the current account at all. Many people in high places had assumed they could be.

The horrible truth is that, when we talk about the annual deficit, the SIC doesn’t have useable reserves of £249.9m, or even £196m. That’s a myth and always was. All it has for covering a deficit is the income from the £47.7m in the Harbour Reserve Fund. At current, assumed, rates of return that will generate only £2.75m a year, plus £2.1m in harbour profits that go into the fund. So the true figure of affordable subsidy to bridge the gap is £2.75m + £2.1m = £4.85m – say £5m plus any grants we can lay hands on.

Truly, the imperial wardrobe is somewhat depleted. But don’t ever be the boy in the street pointing it out.

James Thurber once asked: “Why, oh why must the Shattermyth be, a Crumplehope and a Dampenglee?” I don’t enjoy being a Jeremiah. This council has much to be proud of and I always enjoy talking up our municipal achievements, particular­ly when I’m sooth in The Big Island. However, I can’t ignore the fact that the council isn’t living within its means. Those means are still extensive, more than adequate to support a large, skilled and valued workforce delivering first class services to the people of Shetland, even after the coming shock of a 20 per cent cut in spend­ing over two years. So there’s no reason for all our hopes to be crumpled and everyone’s glee dampened, if only we can balance the books.

We have to do it now, this year. Those who imagine we can bring the deficit down to a level the Harbour Reserve Fund can afford, without at least some compulsory redundancies, are kidding them­selves. That doesn’t mean we want the SIC to fire people, let alone 588 of them. We don’t. That’s why we’re doing our best to find other savings first. That’s why the practical suggestions that came from the public meetings are so important.

It’s painful to speak plainly about the financial crisis now upon us: we really will have to cancel or delay some cherished projects (although I think most members would still hope to build the new Eric Gray Centre and the new Anderson High School); others we will have to scale down or put on hold for many years. Thousands of voters will be annoyed, disappointed – and even more disillusioned with local politicians than they are already. Some old friends of my own leftish persuasion will brand us all as reactionaries who’ve abandoned our principles and now take a savage pleasure in “making cuts for the sake of cuts”. To these critics I say: we’re making cuts for the sake of solvency. Unlike Alistair Carmichael’s Tory government, councillors can’t print money to postpone financial problems, even if those problems are largely of the council leadership’s own making, after years of political mismanage­ment and poor stewardship.

All councillors will come under pressure from concerned and exasperated constituents over the next few months, as we struggle to balance next year’s budget. Any (or all) of us could become political casualties as a result, at the council elections next May. But restoring council solvency and preserving public services as far as possible are much more important goals than saving what remains of our individual political reputations and careers.

Jonathan Wills


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