2024/25 MEDIUM TERM FINANCIAL STRATEGY
To secure the financial health and viability of the Service in the future and develop sustainable financial plans to make Derbyshire Safer together
Summary
Purpose
The purpose of the Medium-Term Financial Strategy (MTFS) is to provide information to Members, officers, the public and other stakeholders on the Authority’s planned revenue and capital expenditure and it’s financing over the next four years.
The Service’s financial strategy balances the application of our savings, reserves, treasury management, capital, borrowing, investment, and council tax strategies in order to provide value for money to the taxpayer and to safeguard frontline service provision to the community.
Our approach
Each year the Service is required by statute to prepare and approve an annual budget and to set a
Council Tax precept. These cannot be affectively agreed without considering the longer-term
forecasts, objectives and priorities.
The strategy supports affordable, sustainable service delivery through the planned use of revenue
budgets, capital budgets, reserves and balances. It contains or is shaped by our:
• Reserves Strategy
• Council Tax Strategy
• Treasury Management Strategy
• Investment (Property, Equipment, Transport) Strategies
• Workforce Planning Strategy
• Savings Strategy and
• Capital Strategy
The Strategy will be updated as further information becomes available and key assumptions change.
The full detail of Derbyshire Fire and Rescue Services budget from 2024/2025 will not be known until the detailed work around growth requirements and savings has been undertaken. The overall size of the service budget is heavily reliant upon the local government finance settlement which is not expected to be published in draft until late December 2023.
It is a statutory requirement under Section 33 of the Local Government Finance Act for the Authority to produce a balanced budget for the following year. In 2023/24 the service set a balanced budget but identified a budget gap in later years.
The previous MTFP and MTFS were heavily influenced by the increasing levels of inflation, energy crisis and rising interest rates. The
impact of the continued war in Ukraine was felt explicitly as the cost-of-living crisis impacting both the Fire Service and the residents of Derbyshire. The nation was gripped by ongoing pay disputes and threats of industrial action across many different sectors including the Fire Service. Whilst some of the conditions have eased as inflation and interest rates, although remaining high, appear to have peaked, their longer-term effect can still be felt. The conflict in Ukraine continues and further military action is underway within the middle east, increasing the potential for more financial volatility in the coming years. The UK will also face the prospect of another change in leadershipand political direction with an anticipated general election in 2024.
2023 / 2024 Medium Term Financial Plan
The 2023/24 Financial settlement was largely favourable to the Fire Service as the government continued previous grant allocations for the new Revenue Services Grant and Protection Uplift Grant. Increases in the Revenue Support Grant and the NNDR multiplier were also link to the prevailing RPI and so saw significant increases. Most notably additional precept freedoms were given to relevant bodies with a £5 limit for the Fire Service. The service recognised the significance of this change and implemented the full increase.
Despite the increase cost of finance and construction the service recognised the need for investment and continued to work towards
providing 2 new stations within the medium term. At each stage the service has reviewed the market conditions and costs and continues to review plans to ensure they are affordable and the right decision for the people of Derbyshire.
2023/2024 Financial Performance
Unlike the 2022/23 position where world events spiked after the setting of the relatively stable budget, causing significant changes in
estimates, the 2023/24 plan was set with more anticipation of future changes. Some areas continue to see variances where rising costs have surpassed assumptions but far less than in the previous year. Currently only the cost of Energy is emerging as a significant variance pressure from the current year.
The current year monitoring anticipates an underspend due in part to the level of vacancies being experienced within many support roles.Whilst this creates a temporary financial benefit the reduce resources have a detrimental effect on the capacity of the service and in the longer term on the current employees. The service has recognised the need to review the position and is undertaking a Pay and Reward review, to be implemented in 2024.
The 2023/24 Medium Term Financial Plan identified a budget gap of £1.2m by 2026/27. In response the service has undertaken a review of budgets and spend and begun to create a savings plan to address the gap. Many of the savings identified have been able to be implemented during the current year which contributes to the 2023/24 underspend. The benefit of realising these efficiencies early creates an increased underspend which can be transferred to reserves to fund future investment and reduce the cost of future borrowing.
Government Funding
The Government has faced significant pressure to ease the cost-of-living burden on households, rather than being able to reduce national borrowing and address the legacy cost of the Covid pandemic. The energy cap and rebate delivered through the winter has now ended but the government still faces pressure for support as interest rates and rising inflation continue to put pressure on individuals and homeowners.
The Bank of England has continued to use interest rate increases as its primary tool for effecting interest. The continued increases have taken time to have any impacted as many aspects of inflation had been ‘baked in’ due to the rising cost of living and increases in energy costs. It appears that inflation has now begun to reduce but many commentators are split over the underlying reason. Indeed, in the last 2 meetings of the BOE Monetary Policy Committee proposals to increase, maintain and decrease interest rates have all be made. This illustrates the differences of opinion for the financial trajectory for the country.
Unfortunately, the timing of Government decisions around public sector financing do not allow much time to respond. The final local
government settlement is often not released until the February before the new financial year commences. A draft settlement is usually available in the autumn but can be delayed until immediately before the Christmas recess. This is the anticipated situation for the current year and an announcement is not expected before 21st December 2023.
The service will continue to model the level of government funding on a worse, best and reasonable case to give the full range of outcomes.The current Derbyshire Fire and Rescue Service precept ranges from £57.23 to £171.68. The average, as measured as a Band D property equates to £85.84. Each 1% increase in the precept represents a charge of 86p per year and generates circa £256,000 annual income for the service. The service, as a part of the National Fire Chiefs Council submission, has partitioned for the council tax precept flexibilities to be continued into 2024/25. This would give the service a greater option of council tax precepts.
What is the scale of the challenge?
The service has continued to monitor the changing environment and its impact on service proposals. A best, worse and reasonable case factor has been applied to the significant variables within the MTFP (inc, pay awards, inflation, use of reserves, government funding, borrowing, interest rates etc) to generate a number of different scenarios. Modelling also includes the potential impact of emerging changes to service budgets. These include:
• Variances from current monitoring
• Changes to staffing structures
• Savings immediately realised
• Future planned savings
• Pay and Reward project
• Revised financing for the Replacement Mobilising System
• Decontamination project implications
• Need for continued investment
The new build station at Matlock is underway and the Glossop station will soon go to tender. These were both included in the current
MTFP but plans for a 3rd station initially included were removed due to affordability. However, the service cannot ignore the need for further investment and the condition of our property stock. Therefore, proposals to investigate a 3rd station rebuild are included in the financial modelling.
The current model as per the graph below indicates the range of possible best and worst-case positions. Each factor in the extreme cases is possible but the overall worse and best cases would require all factors to be highly beneficial or detrimental. While some factors are linked and would move in synchrony a mixed and less extreme outcome is more likely.
The reasonable case modelled suggests an emerging gap in later years of the MTFP growing to approx. £0.85m. This is after the
achievement of £0.80m savings and the required capital investment. It does not include the impact of a larger council tax increase, if
available, which would remove the need for potential cuts to service levels.
2024 / 2025 Medium Term Strategy
The previous strategy temporarily paused some major capital investment and avoid at all possible the need to undertake any new borrowing. This would also allow time for the construction industry to stabilise and rising interest rates to peak, potentially declining and reducing borrowing costs. This has in part happened and although rates remain high, they are forecast to reduce. A return to more normal levels of inflation and interest rates is anticipated in the next 12 -18 months.
The service now needs to plan for other required capital investment that will be financed through reserves in the short term to again avoid borrowing at peak interest rates. Reserves have grown over recent years and are forecast to be £12m at the yearend after use of £5.3m to finance capital investment. This provides more reserve funding allowing interest rates to fall.
The increased use of reserves is felt appropriate at this time as it provides suitable funding for the key decisions being made and helps avoid longer term financial commitments. Reserves have been held for key areas identified as corporate risks e.g., decontamination. However, it must be appreciated the overall reduction in reserves will impact on the services liquidity position and its ability to respond to new emerging risks.
The service has identified areas of savings and base budget reviews that reduce the overall budget gap. It is vital a commitment to realising all the identified savings in business cases is made to avoid creating an over budget provision. Work on these and other areas of efficiency and savings will continue. Savings will continue to be investigated under the themes previously identified.
• The Capital Programme
• Vehicles Review (Fleet, equipment & maintenance).
• Vacancies
• Ways of working
• Apprenticeship / Training Review
• Use of the estate
• Use of technology
The service cannot ignore the need to invest in certain areas over the medium term and any such decisions will be scrutinised to ensure they are necessary, provide value for money and ultimately are the right decision for the residents of Derbyshire. The service continues to work in collaboration with partner organisations providing efficiencies for both parties and in 2024 will complete a Fire Safety Cover review alongside Nottinghamshire Fire and Rescue Service. This joint review will help inform future decisions we make on our ‘Resourcing to Risk’.
Our Capital Strategy
The Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code requires local authorities to produce a Capital Strategy to demonstrate that capital expenditure and investment decisions are taken in line with service objectives and take account of stewardship, value for money, prudence, sustainability and affordability.
The main objectives of the Capital Strategy are: -
• To ensure that capital investments and the management of resources contribute fully to the Authority’s Vision, Values and Priorities
as outlined in ‘Our Plan’
• To ensure efficient use of limited resources and assets with regard to affordability and risk
• To provide a framework for the management and monitoring of the Capital Programme
• To ensure the most cost-effective use is made of existing assets and new capital investment.
Our approach
The service remains committed to ensuring the facilities provided are fit for purpose. The service will continue to plan for investment and ensure proposals are affordable and prudent considering the immediate and longer-term financial impacts. The service has a good track record at adjusting to changing financial climates in the investment decisions it makes.
Our commitment to the safety of our residents and fire fighters will be maintained and investments in necessary appliances and equipmentwill continue.
Capital Expenditure
Capital expenditure is incurred on the acquisition or creation of assets, or expenditure that enhances or adds to the life or value of an
existing asset. These are assets that yield benefits to the authority for a period of more than one year, e.g., land, buildings, vehicles.The Capital Programme is the Authority’s plan of capital works for future years and how they are to be financed.
Financing the Capital Programme
The Authority can invest in a capital programme as long as its capital spending plans are affordable, prudent and sustainable.
The main sources of finance for capital spending are as follows:
• Capital Receipts (from sale of the Authority’s assets)
• Capital Grants
• External Contributions
• Earmarked Reserves
• Revenue Contributions
• Prudential Borrowing
The Prudential Code requires the Authority to report on a number of indicators in relation to Treasury Management activities; these are reported fully to Members in the Treasury Management Strategy in February and then throughout the year in capital and prudential indicator monitoring reports. With regard to borrowing, the Authority must report on the operational and authorised limit of debt. The operational boundary takes account of the Authority’s existing debt plus the most likely estimate of capital expenditure and financing for the year. The authorised limit sets the maximum external borrowing for the Authority and cannot be exceeded during the year.
The service will seek to avoid new borrowing during this time of peaking interest rates so as to prevent long term debt financing
commitments. The use of reserves and internal borrowing will be maximised to the benefit of the service.
Governance Arrangements
It is important that an appropriate governance framework is in place to support the Capital Strategy and as such the following procedures are in place:
• All schemes included in the Capital programme must be approved by Fire Authority
• The budget for each capital scheme is assigned under the control of one project manager • Officers monitor the progress of the Capital Programme on a monthly basis
• Progress of the Capital Programme is reported to Fire Authority on a quarterly basis
• The authority’s Financial Regulations and Standing Orders provide strict guidelines in relation to capital budgets and variations to
spend
Knowledge and Skills
In order to manage the Capital Programme, the Authority employs qualified and experienced staff. Access to courses is provided to enable staff to keep skills up to date and complete their Continuing Professional Development (CPD) requirements.
The Authority also procures, where required, expert advice and assistance externally.
The Authority ensures that Members are suitably qualified to undertake their governance role.
Our Treasury Management Strategy
The overall objectives of our Treasury Management Strategy are as follows:
• To ensure sufficient funding is available for day-to-day activities and capital projects through the effective management of cash flow
• To seek to reduce the financial impact on the revenue account of net interest costs through optimal levels of borrowing and
investment levels
• To ensure the security of investments and liquidity of funds. To maximise income from the Authority’s investments after ensuring these two considerations are met
Background
A detailed Treasury Management Strategy is approved by Fire Authority annually.
Derbyshire Fire and Rescue Authority have a statutory responsibility to safeguard prudence and sustainability of its capital investment. The Local Government Act 2003 (the Act) and supporting regulation requires the Authority to ‘have regard to the CIPFA Prudential Code and the CIPFA Treasury Management Code to set Prudential and Treasury Indicators for the next three years.
It is a statutory duty under Section 3 of the Act and supporting regulations, for the Authority to determine and keep under review how much it can afford to borrow, referred to as the ‘Affordable Borrowing Limit’.
The Authority must have regard to the Prudential Code when setting the Authorised Limit, which requires that total capital investment
remains within sustainable limits and has an acceptable impact upon future council tax levels.
Approach
In contemplation of its Treasury Management Strategy, the Authority gives due consideration to the following:
• Prudential and Treasury Indicators
• Treasury limits in force and Treasury ‘risk’
• Borrowing requirements
• Interest rate prospects
• The security of capital and the liquidity of investments.
The Authority values both security and liquidity above financial return and employees Treasury practices to safeguard investments. The Authority also engages with Treasury advisors to benefit from expert advice and experience.
Increasing interest rates have presented the service with an opportunity to realise greater investment gains. This has benefit of reducing the current pressures on the MTFP. However, the service will continue to pursue liquidity and security over gain in its treasury activities. Plans to utilise reserve balances over the medium term will impact the services ability to continue generating significant investment gains. The loss in investment returns will be less than the saving made by avoiding capital financing costs.
The detailed strategy will be presented with the detailed MTFP in the Budget report for the Fire Authority.
Our Savings Strategy
Background
Savings are required to bridge the gap between spending pressures and available funding. The Authority is facing continued and increasing pressure to:
• Find even more savings to balance the budget over the medium term
• Achieve and maintain financial stability over the medium and longer term
• Deliver agreed priorities and objectives, including meeting changing statutory and legislative duties
• Deliver value for money for local people and taxpayers, through working together with our partners.
It is evident that savings will still need to be delivered between now and 2027/2028 in order to balance the budget. An updated position will be reported to Members in February 2024 as part of the Medium-Term Financial Plan and 2024/2025 budget setting process including proposed savings for the service.
Work has already identified savings plans for 2024/25 with many to be implemented before the budget gap emerges. These will be
presented for approval at the Fire and Rescue Authority. The review and identification of savings will become a regular process to ensure the service can publish a balanced position.
Reserves Strategy
The Authorities strategy is to hold appropriate balances to provide contingency funding, to manage spend profiles across financial years, to hold grants and contributions received separate until utilised and to allocate funding to future strategic projects and identified risks.
Due to the increase in interest rates and rising cost of borrowing the service will replace as far as possible any debt financing within the capital programme with the use of reserves.
Background
The requirement for a local authority to maintain financial reserves is acknowledged in legislation: the Local Government Act 1992 requires billing and precepting authorities to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget requirement.
In accordance with the 1988 Local Government Finance Act the Chief Finance Officer (Section 151 Officer) must report if there is or is likely to be unlawful expenditure or an unbalanced budget. This would include situations where reserves have become seriously depleted, and it is forecast that expenditure will exceed resources.
The External Auditors are not responsible for prescribing the optimum or minimum level of reserves for individual authorities or for
authorities in general, but they are required to review and report on the level of reserves and balances. The External Auditors’ view as to whether an authority has strong financial management and sound financial standing will be supported by their review of the process usedmto determine and approve the level of reserves.
Determining the level of reserves
The Reserve Strategy is reviewed annually to ensure that it remains relevant and up to date, reflecting the medium to long term needs of the Authority. Determining the appropriate level of reserves is a balance of holding a prudent level of financial security for unforeseen pressures against using funds for investment into the service.
The Authority holds several different reserves, each of which are explained in this Strategy, and all support the prudent and sustainable approach to budget setting, which has existed for many years. Reserves are held for several reasons.
The Authority holds reserves which fall into two distinct categories:
• General Reserves: these are necessary to fund any day-to-day cash flow requirements and to provide a contingency in the event of any unexpected events or emergencies, and
• Earmarked Reserves: these have been created for specific purposes and involve funds being set aside to meet known or predicted future liabilities.
Such reserves are intended to smooth the expenditure profile and avoid liabilities being met from Council Tax or the need to make offsetting savings in the year that expenditure is incurred.
There is not a standard recognised formula for determining the level of reserve that each local authority should maintain. It is the
responsibility of the Section 151 officer to recommend an appropriate level for Reserve balances. In establishing an appropriate level, the local circumstances and the potential issues/risks that may occur across the medium term are considered. In determining an appropriate level of reserves for Derbyshire Fire and Rescue Service the range of risks and issues that should be considered include the following:
• The possibility of predicted shortfalls in future years of the MTFP requiring additional savings to be delivered. Such savings may
need additional time to develop or initial investment to enable a saving to be realised,
• To provide cover for extraordinary or unforeseen events occurring: given that the purpose of the fire and rescue service is to respond
to emergency situations, there is always the potential for additional, unexpected and unbudgeted expenditure to occur,
• The commitments falling on future years as a result of capital plans and proposals to improve/develop the asset held by the Authority.
Having reserves would mitigate the impact on the revenue budget of borrowing and/or revenue contributions to capital,
• The risk of inflation,
• Enable the Authority to resource one-off policy developments and transformation initiatives without causing an unduly disruptive impact on Council Tax,
• Spread the cost of large-scale projects which span several years,
• Impacts of the McCloud pension case and significant costs relating to the remedy. The actual funding of the remedy and
compensation remains unknown but could impact on the Authority.
General Reserves
The General Reserve provides a contingency to cushion the impact of unexpected events and exceptional costs and in extreme
circumstances would be used to provide a working cash balance to cushion the impact of uneven cash flows. The General Reserve is held as an emergency fund and so is not used in day-to-day operations.
There has been considerable debate about the level of general reserves that are being held by authorities. Whilst there is no specified
minimum general reserve level, many authorities have adopted 5% of the net revenue budget as an appropriate level.
For Derbyshire Fire Authority, the level of General Reserve at 31 March 2023 stood at £1.9m which is in line with 5% of the budget.
Although the Revenue budget may change from year to year the General Reserves will be maintained at £1.9m whilst this is sufficiently close to the target level.
In addition to the General Reserve the authority holds several other non-earmarked reserves. These are identified below:
Strategic Risk Reserve – This is the main reserve used by the authority to meet unforeseen pressures above current budgetary provision where a specific reserve does not exist. In addition, the reserve can be used to provide temporary funding to cover delays or shortfalls in delivering IRMP programme savings and to provide an unallocated reserve to cushion the impact of funding cuts.
Capital Receipts Reserve – Used to hold capital receipts from the sale of fixed assets until they are used as funding for further investment in the capital programme.
Earmarked Reserves
In addition to General Reserves the Fire Authority has several earmarked reserves. These have been set aside to support capital and
revenue expenditure in future years. They contain funds identified by the authority and grant income that remains unspent.
An annual review led by the Head of Corporate Financial Services and Senior Leadership Team is undertaken to ensure all earmarked
reserves carried forward into the following financial year are still justified with clear plans for their usage. In addition, future risks and the need to create or increase reserve balances is considered.
During the year end the treatment of any resulting underspend is considered and allocated to:
1. earmarked reserves to meet future risk,
2. to increase General Reserves (at the discretion of the S151 officer),
3. to the Capital development Reserve to reduce the need for future borrowing.
The forecast levels reflect the planned usage of reserves to meet anticipated expenditure. The main earmarked reserves are explained below.
Capital Development Reserve - To support the Capital Programme and the Authority’s commitment to longer term planning while
cushioning the impact of any borrowing. Used to fund future capital programme schemes where borrowing is less desirable in particular assets with shorter lives e.g., ICT. In additional the reserve gives flexibility to finance investment not strictly meeting the capitalisation criteria e.g., hosted or managed ICT systems.
Grant Reserves – Used to hold individual Grants received by the Authority that are currently unused or span more than one year. These include:
• Building Risk Grant
• Protection Uplift Grant
• Protection Grant - Accreditation
• Section 31 Grant
• ESN Grant
Workforce Planning - Held to ensure that a high level of training provision is in place to replace the potential skills loss predicted following the implementation of the McCloud remedy.
Pensions Risk Reserve – To provide for the potential liabilities falling on the Service from the various legal challenges including McCloud and Sergeant.
Protecting the Most Vulnerable – Established to safeguard prevention activities currently undertaken with partner agencies in the main, and to support schemes and partners in providing health and wellbeing support to the most vulnerable members of our community.
PPE – To provide resources for investment in PPE enhancement and replacement in addition to annual budgets.
Our Council Tax Strategy
Background
Council Tax receipts make up approx. 75% of the Services income. It is subject to significant central control, much of which is contained in primary legislation. For several years a 2% cap has been in place for Fire Authority precept increases. For 2023/24 and additional flexibility up to £5 was granted which the service adopted. The 2024/25 level has not yet been agreed, but the service has jointly submitted to the Government for the £5 option to continue.
The Authority has looked to limit council tax increases as far as possible but has also to consider its financial resilience considering projected budget deficits, pay and price inflation, rising employer pension contributions, required investment and other budget pressures. Band D Council Tax for 2023/24 is set at £85.84. The Authority considers precepting options as the only significant measure it controls to support investment into the Service and to assure that the future resilience of Derbyshire communities is not compromised. Precepting options will continue to be considered alongside the level of available reserves and borrowing as well as investment needs.
Other Supporting Strategies and documents
The Medium-Term Financial Strategy supports other key Corporate Strategies and documents such as:
• Integrated Risk Management Plan (Our Plan) (IRMP)
• Scheme of Delegation
• Financial Regulations
• Anti-Fraud and Corruption Strategy
• People Strategy
• Asset Management Plan
• Procurement, HR and ICT Strategies.
These documents are key in embedding the Authority’s Vision, Priorities and Values and serve to ensure that the Service has the financial resource, people, ICT and property resources necessary to deliver its priorities.