This publication sets out the agreed revenue and capital budget set by the Combined Fire Authority at its meeting in February 2022.

The annual budget is the means by which the Authority expresses, in financial terms, its plans for service provision during the forthcoming year.

Section 1 – Executive Summary

Section 2 – Revenue Budget

Section 3 – Capital Budget

Section 4 – Reserves and Balances

Section 5 -Treasury Management

You can find an accessible html version below with attached documents or alternatively there is a PDF version available

 

  • Revenue budget

    In line with the Authority’s objective to deliver affordable, value for money services the Authority’s Budget Strategy remains one of: –

    • Maintaining future council tax increases at reasonable levels, reducing if possible;
    • Continuing to deliver efficiencies in line with targets;
    • Continuing to invest in improvements in service delivery;
    • Continuing to invest in improving facilities;
    • Setting a robust budget;
    • Maintaining an adequate level of reserves.

    Budget

    In order to determine the future budget requirement, the Authority has used the approved 2021/22 budget as a starting point, and has uplifted this for inflation and other known changes and pressures, to arrive at a draft budgetary requirement, prior to utilising any reserves, as set out below: –

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Preceding Years Draft Net Budget Requirement 58.2 63.0 63.4 65.1 66.7
    Add back previous years unidentified savings target 0.3
    Add back previous years Vacancy Factors 1.4 1.9 1.3 1.2 1.0
    Inflation 2.0 1.4 1.5 1.5 1.5
    Other Pay Pressures 0.1 (0.1)
    Committed Variations (0.1) 0.1 0.3 0.3 0.3
    Growth 3.8 (1.8) (0.5)
    Efficiency Savings (0.9) 0.2
    Gross Budget Requirement 64.9 64.7 66.3 67.7 69.7
    Vacancy Factors (1.9) (1.3) (1.2) (1.0) (1.3)
    Net Budget Requirement 63.0 63.4 65.1 66.7 68.4

    Inflation

    The following amounts have been added to the budget in respect of inflationary pressures, in line with current estimates: –

    Table 3 Details of Inflation

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    The impact of the unbudgeted pay awards in 2021/22:

    • Grey book (operational staff) at 1.5% from 1 July 2021 onwards
    • Green book (support staff) estimated at the most recent offer of 1.75% for the full financial year (not yet agreed/implemented, hence there is considerable uncertainty around the eventual scale of this)
    0.7
    A 2% allowance has been built in for all future pay-awards 0.8 1.0 1.1 1.1 1.1
    Non-pay inflation

    • Energy – 25% inflation for 22/23 and subsequently 2.5% thereafter
    • Fuel – 12.5% inflation for 22/23 and subsequently 2.5% thereafter
    • Rates – 5% each year
    • Other – 2.5% each year
    0.5 0.4 0.4 0.4 0.4
    2.0 1.4 1.5 1.5 1.5

    Each 1% pay award in excess of the above assumptions equates to an additional cost of £400k per year for grey book personnel, and £75k for green book personnel.

    Other pay pressures

    Table 4 Details of Other Pay Pressures

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Employers National Insurance increase of 1.25% in relation to the Health and Social Care levy (this is offset by a new Service Grant allocation – see funding section later in the report) 0.3
    Pay has been re-costed, taking account of changes to personnel, grades etc.

    Given this accounts for the majority of the overall budget it is worth highlighting some of the assumptions used: –

    Wholetime Pay

    Approx. 200 personnel are currently paid at development rates of pay, it is assumed that this continues at this level throughout the budget period.  (If all personnel were paid at competent rates of pay this would cost an additional £1.2m)

    Approx. 385 personnel are currently paid CPD, it is assumed that this continues at this level throughout the budget period. (If all personnel were paid CPD this would cost an additional £0.1m)

    Approx. 30 personnel are currently ‘opted out’ of the Firefighter (FF) pension scheme, it is assumed that this continues at this level throughout the budget period (if all personnel were in the pension scheme this would cost an additional £0.3m)

    The Firefighter pension scheme transitional arrangements are due to be ended, with all firefighters transferring into the 2015 scheme on 1 April 2022, a reduction of £0.3m

    On-Call Pay

    Approx. 225 of all on-call personnel are currently paid at development rates of pay, it is assumed that this continues at this level throughout the budget period (if all personnel were paid at competent rates of pay this would cost an additional £0.2m)

    Approx. 80 on-call personnel are currently paid CPD, it is assumed that this continues at this level throughout the budget period (if all personnel were paid CPD this would cost an additional £0.1m)

    Approx. 80 personnel are currently ‘opted out’ of the Firefighter pension scheme, it is assumed that this continues at this level throughout the budget period (if all personnel were in the pension scheme this would cost an additional £0.2m)

    The Firefighter pension scheme transitional arrangements are due to be ended, with all on call firefighter transferring into the 2015 scheme on 1 April 2022, a very small reduction of £6k.

    Support Pay

    The budget is based on the assumed scale points of personnel in post at 1 April 2022. No allowance has been made for future incremental progression or staff turnover where typically new starters commence at the bottom of the pay grade.

    Approx. 10 personnel are currently ‘opted out’ of the LGPS pension scheme, it is assumed that this number remains consistent throughout the budget period (if all personnel were in the pension scheme this would cost an additional £30k)

    (0.2) (0.1)
    0.1 (0.1)

    Committed variations

    Committed variations are those items which are unavoidable, or which arise from previously agreed policy decisions.

    Table 5 Details of Committed Variations

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    The budget reflects the additional drawdown against the apprentice levy, net of our 5% co-investment cost. The increase arising from the government funding of 95% of any levy account shortfall,

    The extent of the levy drawdown depends on the number and timing of wholetime (WT) recruits in training, hence the reductions in future years reflect the reduction in recruit numbers.

    (0.3) 0.2 0.1 0.1
    Interest receivable has increased in 22/23, reflecting the change in bank base rates.

    The increased capital financing charge in 25/26 and 26/27 reflects borrowing requirements associated with the capital programme (as referred to in the Capital budget report elsewhere on the agenda)

    (0.1) 0.2 0.2
    Other 0.3 0.1 0.1
    (0.1) 0.1 0.3 0.3 0.3

    Growth

    Table 6 Details of Growth

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    The number and timing, and hence cost, of recruit firefighters is affected by:

    Changes in establishment, we have built in agreed changes to this. However, the cessation of day crewing plus (DCP) and the outcome of the emergency cover review (ECR) will affect establishment levels in the future but as yet these are unknown and hence have been excluded.

    Retirements/leavers, we have incorporated anticipated retirements and an assumed level of early leavers into our forecasts. However, the on-going uncertainty surrounding pensions may have an impact on these, and whilst we have increased our allowance for this there is no guarantee that this will be accurate (further details are set out later in the report).

    As such the budget allows for the following recruits/apprentice FFs each year:-

    22/23 – 87 apprentices/inter-service and On-call transfers

    23/24 – 24 apprentices

    24/25 – 24 apprentices

    25/26 – 24 apprentices

    26/27 – 24 apprentices

    This results in the service recruiting in advance of need, 36 over establishment by December 22, which reflects the uncertain timing of leavers, and the uncertainty surrounding the outcome of the Emergency Cover Review. Staffing numbers will be monitored throughout the period and recruitment requirements updated on a regular basis.

    0.3 (0.5)
    The WT overtime budget is ‘flexed’ to take account of the costs of covering vacancies during the year. As there are a significant level of operational vacancies next year the overtime budget has been increased, with a reduction in 2023/24 reflecting the reduction in forecast vacancies
    Establishment at Training Centre has been increased to reflect the additional recruit courses required next year, as well as the increasing demands on training requirements in general 0.2 (0.1)
    The increase in budget reflects the temporary requirement to enhance the delivery of protection services, and to better integrate this with crews/operational response 0.2 (0.2)
    The capital budget, reported elsewhere on the agenda, identifies a £47m programme over the next 5 years. Based on our current level of revenue contribution, and existing capital reserves and receipts, we would need to borrow £12m in order to deliver against this programme. This would impact on the revenue budget in the form of £0.5m of capital financing charges in future years.

    In order to minimise the need for future borrowing the budget proposes increasing the Revenue Contribution to Capital Outlay (RCCO) to £4.0m in 22/23, reducing to £3.2m in 23/24 and then to £2.7m in 25/26 and 26/27.

    This reduces borrowing requirement by £4.5m, which in turn reduces the future capital financing charges by £0.3m per annum over 20 years.

    It is worth highlighting that even after allowing for this we will still drawdown over £3m of capital reserves next year, and will still need to borrow in 24/25.

    1.7 (0.8) (0.5)
    Capacity within support functions has been a major challenge for a number of years, however, demands placed on these departments has grown significantly in recent years and will continue to do so.

    As such we need to invest in these departments, not only to meet current requirements but also to enhance the service in areas such as

    • On-Call
    • ICT and Digital
    • Climate change
    • Training
    • Resilience

    Without investing sufficiently, we will simply standstill and will be unable to deliver against our ‘road to outstanding’ ambitions (this will be developed following the outcome of the current HMICFRS Inspection)

    As highlighted later in the report recruitment into several departments has been problematic for a number of years, with the situation becoming significantly worse in the last 12 months. We are now carrying over 20 vacant support posts (over 10%), and the most often cited reason for struggling to recruit is comparability of salary. Whilst market supplements have been applied to some posts this is not considered a long-term solution.

    As such we propose undertaking a review of requirements at the start of the new year and have therefore built an allowance into the budget to meet these costs and to put support functions on a sustainable long-term footing. This allowance is included to aid financial planning at this stage, as the actual requirements will not be known until the review is undertaken.

    Note as cost and timing of outcomes is uncertain, we propose transferring any unused funds arising from this into the Capital Funding Reserve, to further reduce the need to borrow in later years.

    1.0
    Members have agreed that the Authority will undertake an Emergency Cover Review (ECR) in 22/23, incorporating the withdrawal of the DCP duty system. It is worth highlighting that converting a DCP station back to the 2-2-4 duty system costs approx. £0.5m, per station, a total of £5.5m across the 11 DCP stations.

    Clearly this is unaffordable and hence we will need to look for alternative solutions. At this stage it is impossible to forecast the outcome of this review. and hence we have assumed it will be cost neutral from a budget perspective.

    If this is not the case then future years budgets will come under increasing pressure and it will become more difficult to set a long-term  balanced budget.

    Pension costs, as members are aware we have previously set aside over £2m to meet backdated employer contributions associated with changes to pensionability of allowances. It has always been assumed that the Government would meet the cost of any backdating, net of both employee and employer contributions, via the pensions holding account that we report each year.

    On a similar basis we have assumed that the Government would meet all costs, including backdated employer contributions, associated with the McCloud judgement and the introduction of Immediate Detriment.

    We have not built any allowance into the budget for any of these costs, however if any such one-off costs are incurred, we may be able to meet these from existing reserves.

    The 2020 valuation exercise on the Fire Fighters pension is on-going, with any  changes arising from this due to be implemented in 2024. It is not clear what impact changes outlined above will have on this, other than that costs will have increased. As a result we are likely to see an increase in employer contribution rates, but the scale of this is as yet unknown. Therefore we have not allowed for this in the budget, pending further clarification.

    Other 0.4 (0.4) 0.2
    3.8 (1.8) (0.5)

    Efficiency savings

    The Authority has a good track record of delivering efficiency savings, with the following savings identified below:-

    Table 7 Details of Efficiency savings

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    We have top sliced the majority of non-pay budgets by 2.5% (0.2)
    Adjust pooled PPE budget to reflect lifecycle replacement requirement (0.2) 0.2
    Reduction in car users/mileage budgets across all budgets, reflecting alternative ways of future working (0.2)
    Other (0.3)
    (0.9) 0.2

    Gross budget requirement

    As set out above the overall gross budget requirement for each year is as follows: –

    Table 8 gross budget requirement

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Draft Gross Budget Requirement 64.9 64.7 66.3 67.7 69.7

    Vacancy factors

    The budget needs to take account of forecast vacancy factors arising from retirement and recruitment profiles:-

     

    Table 9 Details of Vacancy Factors

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    The vacancy/over establishment factor for whole-time has also been updated and is based on the following: –

    Each year a number of personnel who have reached full pension benefits delay their retirement. Whilst this varies each year it averages out at approx. 7 personnel at any point in time. As such we have assumed that all bar 7 personnel who can retire do so immediately.

    An updated early leavers profile, i.e., personnel who retire before reaching forecast retirement date or who resign or are dismissed, of:-

    • 17 in 22/23
    • 12 in 23/24
    • 9 in 24/25
    • 6 in subsequent years

    Recruit numbers are as set out earlier and we assume that all recruits successfully complete the course.

    It is still not clear what further impact either the transitional pension arrangements or making allowances pensionable will have on the retirement profile, or what impact the ECR will have on this.

    Overall, this results in a net over establishment position each year, reflecting the uncertainty surrounding some of the assumptions and the long lead time for recruitment.

    0.1 0.3 0.2 0.5 0.2
    On Call vacancy factors has been increased from 18% to 21% reflecting the current level of staffing, and assuming this remains constant. (1.2) (1.2) (1.3) (1.3) (1.3)
    Support staff vacancy factor has been increased from 3.75% to 10.0%, broadly reflecting the current level of vacancies. It must also be recognised that the review of capacity in support functions may lead to a temporary increase in vacancies, pending successful recruitment.

    This has been reduced back to 5% in 23/24 and 2.5% in subsequent years.

    (0.8) (0.4) (0.2) (0.2) (0.2)
    (1.9) (1.3) (1.2) (1.0) (1.3)

    Net Budget Requirement

    As set out above the overall net budget requirement for each year is as follows: –

    Table 10 Net Budget Requirement

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Draft Budget Requirement 63.0 63.4 65.1 66.7 68.4
    Budget Increase 8.3% 0.6% 2.7% 2.4% 2.6%

    Analysis of Budget by Service Area

    Table 23 Budget by Service Area

     2022/23 Budget  2023/24 Budget  2024/25 Budget  2025/26 Budget  2026/27 Budget
     £m  £m  £m  £m  £m
    Central Admin Hub 0.834 0.896 0.937 0.956 0.976
    Control 1.346 1.396 1.449 1.503 1.559
    Corporate Communications 0.328 0.350 0.341 0.348 0.356
    Executive Board 1.059 1.101 1.135 1.158 1.181
    Finance 0.145 0.156 0.164 0.167 0.170
    Fleet Services 2.683 2.791 2.874 2.943 3.013
    Health & Safety 0.233 0.247 0.257 0.262 0.268
    Human Resources 0.844 0.886 0.828 0.845 0.862
    ICT 3.203 3.326 3.317 3.378 3.465
    Occupational Health 0.241 0.253 0.262 0.268 0.274
    Procurement 0.848 0.885 0.956 1.001 1.194
    Property 1.605 1.657 1.705 1.749 1.794
    Service Delivery 36.577 37.385 38.024 39.153 39.788
    Prevention and Protection 2.893 2.954 3.035 3.102 3.170
    Service Development 1.466 1.522 1.546 1.579 1.612
    Special Projects 0.035 0.035 0.035 0.036 0.036
    Training 5.093 4.596 4.876 4.820 4.929
    Pensions Expenditure 1.351 1.368 1.431 1.435 1.505
    Other Non-DFM Expenditure 2.232 1.579 1.930 1.997 2.275
    Gross Budget Requirement 63.017 63.382 65.101 66.697 68.426

    Analysis of Budget by Type of Expenditure

     Table 24 Budget by Type of Expenditure

     2022/23 Budget  2023/24 Budget  2024/25 Budget  2025/26 Budget  2026/27 Budget
     £m  £m  £m  £m  £m
     Employee
     Uniformed 41.261 41.257 41.883 43.030 43.683
     Support staff 7.205 7.764 8.065 8.231 8.412
     Pensions 1.344 1.361 1.424 1.428 1.498
     Other Employee Related Exp 0.058 0.059 0.061 0.062 0.064
    49.868 50.441 51.433 52.751 53.657
     Premises
     R&M 1.022 1.048 1.074 1.101 1.128
     Utilities 0.691 0.708 0.726 0.744 0.763
     Cleaning 0.380 0.389 0.399 0.409 0.419
     PFI 0.751 0.770 0.789 0.809 0.829
     Other 0.038 0.039 0.040 0.041 0.042
     Rent/Rates 1.352 1.419 1.490 1.564 1.641
    4.235 4.373 4.517 4.667 4.821
     Transport
     Repairs 0.797 0.817 0.838 0.859 0.880
     Running Costs 0.482 0.494 0.506 0.518 0.531
     Travel costs 0.442 0.453 0.464 0.475 0.487
     insurance 0.222 0.227 0.233 0.239 0.244
     Other 0.005 0.005 0.005 0.006 0.006
    1.948 1.996 2.046 2.096 2.148
     Supplies & Services
     Hydrants 0.075 0.076 0.078 0.080 0.082
     Operational equipment 0.599 0.645 0.686 0.704 0.721
     Clothing & Uniform 0.415 0.424 0.476 0.510 0.692
     Printing, stationery, postage 0.154 0.158 0.162 0.165 0.169
     Comms-Network Costs 1.071 1.098 1.125 1.154 1.182
     Telephony 0.201 0.206 0.211 0.217 0.222
     Computers 1.431 1.467 1.504 1.541 1.580
     Subsistence 0.096 0.098 0.100 0.103 0.105
     Fire Safety Expenses 0.302 0.310 0.317 0.325 0.333
     Training Expenses 0.459 0.470 0.482 0.494 0.506
     insurance 0.259 0.264 0.269 0.275 0.280
     Members Expenses 0.175 0.179 0.184 0.188 0.193
     Misc Equipment 0.090 0.092 0.094 0.096 0.098
     Other 2.087 2.260 2.324 2.662 2.735
     Catering 0.086 0.088 0.090 0.092 0.095
     PTV Residential 0.098 0.100 0.103 0.105 0.108
    7.597 7.935 8.204 8.710 9.101
     Other
     Contracted Services 1.106 1.101 1.290 1.156 1.185
     Other 0.004 0.004 0.004 0.004 0.004
    1.109 1.105 1.294 1.160 1.189
     Capital Financing Costs
     Capital Financing Costs 4.100 3.300 3.300 3.025 3.250
    4.100 3.300 3.300 3.025 3.250
     Income
     Income (5.839) (5.768) (5.693) (5.711) (5.741)
    (5.839) (5.768) (5.693) (5.711) (5.741)
    Gross Budget Requirement 63.017 63.382 65.101 66.697 68.426

    Revenue funding 2022/23-2026/27

    Grant funding

    The Government’s Budget will set the overall total for public sector spending which will then be allocated out to departments as part of the Spending Review, and these are then allocated out to individual Authorities as part of the Local Government Finance Settlement, the first draft of which was announced in December.

    Due to economic uncertainty the anticipated multi-year settlement has been postponed again, hence the draft settlement only covers 22/23.

    Similarly, the Fair Funding review, which looked to re-assess the methodology under which funding was allocated to individual authorities, and the implementation of a revised Business Rates Retention Scheme, have both been put on hold for at least a further 12 months.

    The 2022/23 Local Government Finance Settlement showed an increase in the Government’s Settlement Funding Assessment of 1.08%. The Settlement Funding Assessment comprises:-

    Table 11 Details of Settlement Funding Assessment 2022/23

    • Revenue Support Grant (from the Government)
    £8.8m
    • Business Rates (from local billing authorities)
    £11.3m
    • Business Rates Top-Up (from the Government)
    £4.4m
    £24.5m

    Looking beyond 22/23, it is assumed that this will grow in line with this increase and hence we have allowed for 1.0% growth each year. The table below sets out our assumed level of funding (Settlement Funding Assessment) over the next 5 years: –

    Table 12 Forecast Settlement Funding Assessment 2022/23-2026/27

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Estimated Settlement Funding Assessment 24.5 24.8 25.0 25.2 25.5
    Growth 1.1% 1.0% 1.0% 1.0% 1.0%

    Service Grant

    A new one-off grant has been introduced in 2022/23, Services Grant, worth £822 million to local government. This grant allocation is for 2022/23 only, but the Government has confirmed it will work with the sector on how to distribute this funding from 2023/24 onwards. As the grant includes funding for the increase in employer National Insurance Contributions it is assumed that this element will recur in subsequent years, but it may be under a different heading. We have not built in any allowance for the balance of this grant in future years.

    Table 13 Forecast Service Grant

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Service Grant 1.1 0.3 0.3 0.3 0.3

    Business Rates Adjustments

    We have now received final details of our Business Rates from billing authorities. These are £0.5m lower than the Governments estimate of £4.4m, as set out above.

    In addition to the above Business Rates the Authority receives Section 31 grant from the Government to compensate for specific reliefs it has agreed as part of policy decisions, i.e. small business relief etc. This year the anticipated grant has increased significantly to £2.6m, reflecting the higher Government multiplier being applied this year. We have assumed these increases in line with inflation in future years.

    Members will recall that last year the Government agreed to smooth any collection fund deficits over a 3-year period, hence we are carrying a £80k deficit into this year’s budget.

    This year the Government has again provided additional business rate reliefs, such as retail, nursery and newspaper reliefs, recognising the impact of the pandemic on businesses. The Government provided Section 31 grants direct to billing authorities to offset these new reliefs, however as they have to account for these outside the business rate collection fund, this results in a very large deficit across the collection funds of all authorities. Our share of this deficit is £0.8m. The rate relief grant will eventually feed through to preceptors as part of the business rate year end reconciliation, when billing authorities will be required to repay a proportion of the reliefs provided and when the Govt will make an additional grant to ourselves for our share of these. Billing authorities have calculated our share of this at £1.1m. (It is worth emphasising that the actual additional grant in respect of in-year rate reliefs will not be known for some time and may vary from this.)

    We have assumed that the collection fund is in a balanced position in future years, with any deficit netting off against any additional reliefs.

    Table 14 Forecast Business Rates Adjustments

    2022/23 2023/24 2024/25 2025/26 2026/27
    Local Business Rates Adjustment, confirmed by Billing Authorities £0.5m £0.5m £0.5m £0.5m £0.5m
    Section 31 Grant – Business Rates Reliefs (£2.6m) (£2.7m) (£2.7m) (£2.7m) (£2.7m)
    Business Rates Collection Fund Deficit c/fwd from 21/22 £0.1m £0.1m
    Business Rates Collection Deficit in year £0.8m
    Additional Section 31 Grant – Business Rates Reliefs Adjustment (£1.1m)
    Total Business Rates Adjustment (£2.3m) (£2.1m) (£2.2m) (£2.2m) (£2.2m)

    Council Tax

    In setting the council tax, the Authority aims to balance the public’s requirement for our services with the cost of providing this.  As such the underlying principle of any increase in council tax is that this must be seen as reasonable within the context of service provision.

    The Authority became a precepting authority on 1 April 2004. Since this our council tax increases have been limited by either capping or the current referendum thresholds set by the Government. As such our council tax increases and hence budget increases have been constrained by these and our desire to deliver value for money services. Our council tax of £72.27 is still below the national average of £80.06, and our increase of just 13.5% since 2010/11 compares with an average increase of 21.4% over the same period and is the third lowest of any Fire Authority.

    The Local Government Settlement confirmed that “the Government is proposing a 2% core referendum threshold and is consulting on proposals to allow the 8 FRAs with the lowest precept levels to increase council tax by £5 for one year only in 2022/3. This is to assist those FRAs in addressing immediate pressures and to maintain a sustainable income baseline for future years”. It is worth highlighting that this flexibility was last allowed in 2013/14, and that the sector as a whole has been lobbying for re-introduction of this flexibility for all Authorities since this date, hence this a major shift in the Government’s stance, but one which is very unlikely to be repeated in future years.

    Lancashire are in the bottom quartile for council tax levels and hence, if the flexibility is supported following the consultation exercise, this will apply to ourselves. Based on our estimated tax base this will generate £2.25m of funding compared with £650k from a 2% increase, an additional £1.6m. Furthermore, it should be emphasised that this additional funding will set a new council tax baseline and hence becomes a recurring increase.

    Assuming all Authorities increase by the maximum amount permissible (£5 or 2% depending in which quartile they are in) our council tax of £77.27 would still be below the national average of £82.66, and our increase of 21.4% since 2010/11 would compare with an average increase of 25.5% over the same period and will still be the joint seventh lowest of any Fire Authority.

    Council tax base

    The Authorities council tax-base has increased by 1.6%.  For the purpose of medium term forecasting we have assumed that the taxbase increases by 1.5% in subsequent years in line with historic averages.

    Table 15 Forecast Council tax base

    2022/23 2023/24 2024/25 2025/26 2026/27
    Estimated Number of Band D equivalent properties 449,778 456,525 463,373 470,323 477,378

    Last year the Government allocated an additional £670m of Local Council Tax Support Grant to councils, of which our share was £0.8m, to offset the reduction in tax base during the pandemic. It is assumed that this was a one-off allocation, and hence this has not  been allowed for in this year’s budget.

    Last year the Government agreed to smooth any collection fund deficits over a 3-year period, hence we are carrying a £121k deficit into this year’s budget. Billing Authorities have now confirmed that the in-year collection fund surplus is £478k. We have assumed  a surplus in future years of £400k, in line with historic averages:-

    Table 16 Forecast Council Tax Collection Fund

    2022/23 2023/24 2024/25 2025/26 2026/27
    Council Tax Collection Fund Deficit c/fwd from 21/22 £0.1m £0.1m
    Council Tax Collection Surplus in year (£0.5m) (£0.4m) (£0.4m) (£0.4m) (£0.4m)
    Net Collection Fund Surplus (£0.4m) (£0.3m) (£0.4m) (£0.4m) (£0.4m)

    Draft Council Tax Requirements

    Table 17 Forecast Council Tax Requirements

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Draft Budget Requirement 63.0 63.4 65.1 66.7 68.4
    Less Settlement Funding Assessment (24.5) (24.7) (25.0) (25.2) (25.5)
    Less Service Grant (1.1) (0.3) (0.3) (0.3) (0.3)
    Less Business Rates Adjustment (2.3) (2.1) (2.2) (2.2) (2.2)
    Less Council Tax Collection Deficit/(Surplus) (0.4) (0.3) (0.4) (0.4) (0.4)
    Equals Precept 34.7 36.0 37.2 38.6 39.9
    Estimated Number of Band D equivalent properties 449,778 456,525 463,373 470,323 477,378
    Equates to Council Tax Band D Property £77.27 £78.81 £80.38 £81.98 £83.61
    Increase in Council Tax £5.00 2.0% 2.0% 2.0% 2.0%

    (For information, a 1% change to the council tax equates to £0.3m.)

    As can be seen the increase in 22/23 is in line with the additional flexibility allowed for in the  settlement. Increases in subsequent years are in line with the anticipated 2% referendum limit.

    Reserves

    A reasonable level of reserves is needed to provide an overall safety net against unforeseen circumstances, such as levels of inflation/pay awards in excess of budget provision, unanticipated expenditure on major incidents, and other “demand led” pressures, such as increased pension costs, additional costs associated with national projects, etc. which cannot be contained within the base budget. In addition, they also enable the Authority to provide for expenditure, which was not planned at the time the budget was approved, but which the Authority now wishes to implement.

    As such a review of the strategic, operational and financial risk facing the Authority is undertaken each year to identify an appropriate level of reserves to hold, this incorporates issues such as higher than anticipated pay awards, increased number of ill health retirements, etc. The most significant change is the increased risks associated with pension costs arising from the review of pensionability of allowances and the Immediate Detriment position. As such the minimum requirement has increased to £4.0m. As at 31 March 2022 we anticipate holding £6.0m, providing scope to utilise approx. £2.0m of reserves.

    Therefore, the Treasurer considers this reserve is at an appropriate level.

    Robustness of the Revenue Budget 2022/23 

    Under Section 25 of the Local Government Act 2003, the Chief Finance Officer is required to make a statement about the robustness of the budget.

    The professional opinion of the Treasurer is that the budget has been prepared on a robust basis for the following reasons:

    • The budget is reflective of existing service plans;
    • The budget takes account of the anticipated on-going revenue impact of current and future capital programmes (no allowance has been made for any potential borrowing associated with the capital programme as we are still finalising this);
    • The allowances included for inflation and pay awards represent a best estimate of the likely cost of this, at

    Table 19 Inflationary Allowance Included in Budget

    2022/23
    Uniformed Pay Award 2.0%
    Non-Uniformed Pay Award 2.0%
    Non-Pay Inflation

    (Additional inflation has been allowed for in 22/23 in respect of energy and  fuel)

    2.5%
    • As part of the budget setting process all estimates, including savings and income forecast, are assessed for reasonableness;
    • The situation in respect of future funding, and in particular the outcome of next year’s Spending Review and the longer-term impact of the pandemic on business rates and council tax will be kept under review and reported to the Authority in due course.
    • The level of and appropriateness of reserves has been reviewed by the Treasurer, based on the potential risks faced by the Authority;
    • The following significant financial risks have all been assessed and the Treasurer feels that these are adequately covered within the budget estimates presented or within the level of reserves currently held: –
      • Reductions in funding levels over and above those forecast;
      • Reduction in funding via Business Rates retention scheme;
      • Reduction in council tax funding due to changes in collection rates, localisation of council tax support, reducing tax base and/or council tax referendum limits;
      • Higher than anticipated inflation;
      • Larger increases in future pension costs/contributions;
      • Significant changes in retirement profiles;
      • Increase in costs arising from demand led pressures, i.e., increasing staff numbers, overtime due to spate conditions or major equipment replacement requirements;
      • Inadequacy of insurance arrangements

    Budget scenarios

    Without a multi-year settlement is very hard to provide any meaningful funding forecast, however for the purpose of medium-term financial planning we have assumed that funding is increased by 1.0% in subsequent years. Allowing for a £5 increase in council tax in 22/23 and a 2% council tax increase in future years, in line with the likely referendum principles, the Authority is able to set a balanced budget throughout the 5-year plan.

    Looking at the medium-term plans it is clear that the key variables remain future funding levels, pay awards, pension costs and the outcome of the ECR.

    As such additional scenarios are presented below showing the potential impact of:-

    • a funding freeze in future years
    • a 10% reduction in funding over the next 4 years
    • a 3% pay award each year (2% is already allowed for in the budget)
    • a potential 5% increase in employer pension contributions in 24/25, as a result of the McCloud pension judgement
    • an increased cost of £5.5m arising from the ECR and the cessation of DCP
    • an increased cost of £1.0m arising from the ECR and the cessation of DCP

    As can be seen all of these have a significant impact on the remainder of the medium-term strategy ranging up to a £3.8m loss of funding or a £5.5m increase in costs. Although it must be recognised that there may be opportunities to deliver future savings to offset some of these.

    Table 22 Budget Scenarios

    2022/23 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Current Budget Gap
    Revised Gap – Funding Freeze 2023/24-2026/27 (0.3) (0.5) (0.8) (1.2)
    Revised Gap – 10% Funding Reduction 2023/24-2026/27 (0.9) (1.9) (2.8) (3.8)
    Revised Gap – 3% Pay award each year (2% is already allowed for) (0.4) (0.9) (1.4) (2.0) (2.6)
    Revised Gap – 5% increase in employer pension costs in 24/25 (1.5) (1.5) (1.5)
    Revised Gap – £5.5m increase from ECR (1.8) (3.6) (5.5) (5.5)
    Revised Gap – £1.0m increase from ECR (0.3) (0.6) (1.0) (1.0)

    Summary and conclusions

    The lack of a multi-year settlement makes longer term planning more difficult as there can be no certainty around future funding forecasts. Offsetting this is the opportunity provided by the £5 council tax flexibility allowed this year. The Home Office have clearly stated that this flexibility is only for this year, and it is hard to see a situation where that does not prove to be the case in the medium term.

    Raising council tax by the maximum permissible still only increases the overall council tax bill by £5 but generates £2.25m of funding for the Authority. This increase provides an opportunity to address some of the capacity and pay issues within support functions, supporting the delivery of further efficiencies, as well as reduce the pressure on the ECR delivering sufficient change to offset the cessation of DCP and meet future budget pressures. It gives greater long term funding certainty which will form the basis of our future investment requirements, which are essential if we are to hit our ‘road to outstanding’ ambition and be the best equipped, best trained and best accommodated service.

    As a result the Authority agreed a £5.00 increase in council tax for an average band D property:-

    Table 18 Detailed Council Tax Requirement 2022/23

    £m
    Gross Budget Requirement 63.0
    Less Settlement Funding Assessment (24.5)
    Less Service Grant (1.1)
    Less Business Rates Adjustment (2.3)
    Less Council Tax Collection Surplus (0.4)
    Equals Precept 34.7
    Estimated Number of Band D equivalent properties 449,778
    Equates to Council Tax Band D Property £77.27
    Increase in Council Tax £5.00

    The increase of £5.00 per annum equating to 10p per week for an average band D property.

    It is also worth highlighting that Fire accounts for a very small proportion of the total council tax bill, with the 2021/22 average band D bill in Lancashire being  £1,996, of which ‘Fire’ accounts for £72, less than 4%. 

    Whilst the council tax is expressed as a Band D equivalent figure, there are actually 8 property bandings, each of which has a council tax set in proportion to the band D figure (i.e. a band A property is 2/3rds that of a band D charge, and band H is twice that of a band D charge).  The individual Council Tax bandings are set out below: –

    Table 20 Council Tax by Band

    Band A £51.51
    Band B £60.10
    Band C £68.68
    Band D £77.27
    Band E £94.44
    Band F £111.61
    Band G £128.78
    Band H £154.54

    The overall precept is then apportioned between the 14 District & Unitary Authorities pro-rata to their Council Tax base, and they are responsible for billing and collection of this, which they will pay over to the Fire Authority on a pre-determined instalment basis. The precept for each Authority is: –

    Table 21 Precept by Billing Authority

    Blackburn With Darwen Borough Council £2,738,395
    Blackpool Borough Council £2,869,808
    Burnley Borough Council £1,814,841
    Chorley Borough Council £2,944,606
    Fylde Borough Council £2,425,660
    Hyndburn Borough Council £1,626,534
    Lancaster City Council £3,249,977
    Pendle Borough Council £1,849,891
    Preston City Council £3,072,951
    Ribble Valley Borough Council £1,897,211
    Rossendale Borough Council £1,590,217
    South Ribble Borough Council £2,826,916
    West Lancashire District Council £2,910,739
    Wyre Borough Council £2,936,605
    Total £34,754,351
  • Capital strategy/Budget 2020/21-2024/25

    The Authority’s capital strategy is designed to ensure that the Authority’s capital investment:

    • assists in delivering the corporate objectives
    • provides the framework for capital funding and expenditure decisions, ensuring that capital investment is in line with priorities identified in asset management plans
    • ensures statutory requirements are met, i.e. Health and Safety issues
    • supports the Medium-Term Financial Strategy by ensuring all capital investment decisions consider the future impact on revenue budgets
    • demonstrates value for money in ensuring the Authority’s assets are enhanced/preserved
    • describes the sources of capital funding available for the medium term and how these might be used to achieve a prudent and sustainable capital programme.

    Managing Capital Expenditure

    The Capital Programme is prepared annually through the budget setting process and is reported to the Authority for approval each February.  The programme sets out the capital projects taking place in the financial years 2022/23 to 2026/27 and will be updated in May to reflect the effects of the final level of slippage from the current financial year (2021/22).

    The majority of projects originate from approved asset management plans, subject to assessments of ongoing requirements.  Bids for new capital projects are evaluated and prioritised by Executive Board prior to seeking Authority approval.

    A budget manager is responsible for the effective financial control and monitoring of their elements of the capital programme.  Quarterly returns are submitted to the Director of Corporate Services on progress to date and estimated final costs.  Any variations are dealt with in accordance with the Financial Regulations (Section 4.71).  Where expenditure is required or anticipated which has not been included in the capital programme, a revision to the Capital Programme must be approved by Resources Committee before that spending can proceed.

    Capital Budget

    Capital expenditure is expenditure on major assets such as new buildings, significant building modifications and major pieces of equipment/vehicles.

    The Service has developed asset management plans which assist in identifying the long-term capital requirements. These plans, together with the operational equipment register have been used to assist in identifying total requirements and the relevant priorities.

    Slippage from 2021/22

    The 2022/23 programme includes various items of estimated slippage expected from the 2021/22 programme, previously agreed by Resources Committee: – 

    Table 2 Details of Slippage from previous year

    Item Budget

    £m

    Pumping appliances x 7 1.490
    Command support units x 2 0.580
    Turn table ladder (TTL) x 1 0.675
    Water Tower x 2 1.000
    Prime mover x 1 0.215
    Pod x 1 0.028
    CCTV on appliances 0.100
    Enhanced station facilities at Blackpool 0.200
    Drill tower replacements 0.150
    ESMCP 1.000
    Various ICT systems/hardware 0.755
    Total 6.193

    Vehicles

    The Fleet Asset Management plan has been used as a basis to identify the following vehicle replacement programme, which is based on current approved lives:-

    Table 3 Vehicle Requirements (Numbers and cost by type per year)

      No of Vehicles
    Type of Vehicle 2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27
    Pumping Appliance 7 6 5 6 6
    Command Unit 2
    Water Tower 2
    Aerial appliance 1
    All-Terrain Vehicle 1
    Prime mover 2
    Pod 1
    Operational Support Vehicles 16 16 18 11 12
    32 22 23 21 18
    Budget (£m)
    Pumping Appliance 1.490 1.337 1.156 1.421 1.457
    Command Unit 0.580
    Water Tower 1.000
    Aerial appliance 0.750
    All-Terrain Vehicle 0.016
    Prime mover 0.215
    Pod 0.028
    Operational Support Vehicles 0.359 0.459 0.504 0.260 0.353
    3.437 2.795 1.660 1.682 1.810

    Numbers are based on anticipated delivery dates, not order date. Several of the vehicles have long lead times, and stage payments, hence the actual timing of spend is subject to change, with any deliveries spanning across years inevitably resulting in the need to move spend between years, usually this will be in the form of slippage into subsequent years, but occasionally there will be a need to pull budget forward to reflect an earlier delivery/stage completion date. This will be reported to Resources Committee as delivery dates are agreed.

    Both the Water Towers and Aerial Appliance requirements have been approved previously by CFA. With the exception of the these all other vehicles are replacements.

    It is worth noting that LFRS currently has several vehicles provided and maintained by Government under New Dimensions (5 Prime Movers and 1 Utility Terrain Vehicle), which under LFRS replacement schedules would be due for replacement during the period of the programme.  However, our understanding is that Government will issue replacement vehicles if they are beyond economic repair, or if the national provision requirement changes.  Should LFRS be required to purchase replacement vehicles, grant from Government may be available to fund them.  Based on the current position, we have not included these vehicles (or any potential grant) in our replacement plan.

    In addition, Fleet Services continue to review future requirements for the replacement of all vehicles in the portfolio, hence there may be some scope to modify requirements as these reviews are completed, and future replacement programmes will be adjusted accordingly. 

    Operational Equipment

    With the exception of CCTV on appliances, which is an existing project that has previously been approved, all other requirements are replacements for existing end of life equipment:

    Table 4 Equipment Requirements (Cost per year)

      2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    Thermal Imaging Cameras 0.250
    Breathing Apparatus (BA) and Telemetry equipment 0.550
    Cutting and extrication equipment 1.500
    CCTV on appliances 0.100
    1.600 0.250 0.550

    The cost of replacing cutting and extrication equipment will vary dependent upon whether these are  battery operated or not, and we are currently awaiting the evaluation and a decision on this. As such further work is required to refine the £1.5m estimate.

    Each of these groups of assets is subject to review prior to replacement, which may result in a change of requirements or the asset life.

    ICT

    The majority of the spend is on replacement/upgraded systems, with the exception of:-

    • Data Warehouse, which will extract data from our business systems and create common data sets to aid performance management, data analysis and enable users to have self-service access
    • Dynamic cover tool, which supports the Service in determining optimum appliance configuration based on available resources
    • Digitisation of Fire appliances – where additional Vehicle Mounted Data Systems (VMDS) units will be provided, to improve connectivity and accessibility for Service Delivery staff outside of the office based environment

    All replacements identified in the programme will be subject to review, with both the requirement for the potential upgrade/replacement and the cost of such being revisited prior to any expenditure being incurred.

    Table 5 ICT Requirements (Cost per year)

      2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27
      £m £m £m £m £m
    New Systems
    Data Warehouse 0.100
    Dynamic Cover Tool 0.150
    Replace Existing Systems
    Performance management 0.100
    Hydrant Management system 0.025
    Incident Command system 0.100
    Asset Management system 0.050 0.100
    HFSC referral system 0.100
    Pooled PPE system 0.080
    Community Fire Risk Management Information System (CFRMIS) 0.100
    Rota management package (WT/On call) 0.100
    Storage Area Network 0.120
    GIS Risk Info (Cadcorp) 0.100
    WAN (Intrinsic) 0.450
    IRS/MIS (3TC) 0.050
    New Operational Communications
    Digitisation of Fire appliances – additional VMDS units 0.254
    Replace Operational Communications
    ESMCP (Airwave replacement – assumed funded by grant) 1.000
    VMDS replace existing kit 0.361
    Incident Ground Radios 0.180
    Total ICT Programme 2.420 0.180 0.220 0.600 0.100

    (Note HR & Payroll and the Finance system are both outsourced and form part of on-going SLAs, as such no allowance has been made for their future replacement, as it is assumed that any replacement costs are covered by the existing SLA. If at some point the Service moved away from the current SLAs, then we will incur costs in implementing new systems. We have not allowed for this.) 

    Buildings

    The only new scheme included in the above programme is Service Training Centre (STC) Props, which reflects the need to upgrade/replace some of the training props at STC which are nearing end of life. This scheme is at the initial design/feasibility stage with a considerable amount of work required to develop this into a more detailed scheme with more accurate costings. 

    Table 6 Building Requirements (Cost per year)

      2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27
    £m £m £m £m £m
    New Schemes
    STC Props 5.000
    Existing Schemes
    SHQ relocation 3.250 8.750
    C50 – Preston replacement station 0.500 7.250
    C52 Fulwood replacement station 2.500
    W30 – Blackpool Welfare 0.450
    Drill tower replacements (notional 2 per year) 0.450 0.300 0.300 0.300 0.300
    1.400 11.050 9.050 7.800 0.300

    In terms of all the building proposals it must be noted that we are still developing requirements/designs hence costings are indicative only. Furthermore timings have not been agreed pending the ECR and the publication of the Government White Paper on Fire Reform, with the latter pushing back  the timeframes for SHQ relocation. As such the costs and timings shown are to provide some context for decision making at this early stage of scheme developments.

    Total Capital Requirements

    The following table details capital requirements over the five-year period:

    Table 7 Summary Capital Requirements

    2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27 TOTAL
    £m £m £m £m £m £m
    Vehicles 3.437 2.795 1.660 1.682 1.810 11.385
    Operational Equipment 1.600 0.250 0.550 2.400
    IT Equipment 2.420 0.180 0.220 0.600 0.100 3.520
    Buildings 1.400 11.050 9.050 7.800 0.300 29.600
    8.857 14.275 11.480 10.082 2.210 46.905

    Capital Funding

    Capital expenditure can be funded from the following sources:

    Prudential Borrowing

    The Prudential Code gives the Authority increased flexibility over its level of capital investment and much greater freedom to borrow, should this be necessary, to finance planned expenditure.  However, any future borrowing will incur a financing charge against the revenue budget for the period of the borrowing.

    Given the financial position of the Authority we have not needed to borrow since 2007, and repaid a large proportion of our borrowing in October 2017.

    Capital Grant

    Capital grants are received from other bodies, typically the Government, in order to facilitate the purchase/replacement of capital items.

    There is an expectation that the ESMCP project costs carried forwards from 2021/22 will receive £1.0m grant funding which is included in the programme, however we have not had any confirmation that LFRS costs will be met from grant.  To date no other capital grant funding has been made available for 2022/23, nor has any indication been given that capital grant will be available in future years, and hence no allowance has been included in the budget.

    Capital Receipts

    Capital receipts are generated from the sale of surplus property and vehicle assets, with any monies generated being utilised to fund additional capital expenditure either in‑year or carried forward to fund the programme in future years.

    The Authority expects to hold £1.7m of capital receipts as at 31 March 2022.  This will be fully utilised during the 5-year programme.

    Anticipated sale proceeds of £2m have been included in respect of the potential sale of the existing Fulwood site, reflecting the relocation of SHQ and the development of Fulwood Fire Station.

    Capital Reserves

    Capital Reserves have been created from under spends on the revenue budget in order to provide additional funding to support the capital programme in future years. The Authority expects to hold £16.7m of capital reserves as at 31 March 2022, after allowing for the transfer of the year end revenue underspend of £0.4m and the transfer of £0.4m of earmarked reserves into this (as referred to in the reserves and balances policy elsewhere on this agenda).  Over the life of the programme we anticipate utilising all these reserves.

    Revenue Contribution to Capital Outlay (RCCO)

    Any revenue surpluses may be transferred to a Capital Reserve in order to fund additional capital expenditure either in‑year or carried forward to fund the programme in future years.

    As referred to in the Revenue Budget report, elsewhere on this agenda, the revenue contribution to capital in 22/23 has been increased to £4.0m, with  gradual reductions over the remainder of the five-year programme, giving a total contribution of £15.8m over the life of the programme.  This reduces the need to borrow and hence the capital financing charge associated with this.

    Drawdown of Earmarked Reserves

    £0.25m has been drawn down from the Innovation Reserve to fund the digitisation of fire appliances project.

    Drawdown of General Reserves

    No allowance has been made for the drawdown of any of the general reserve.

    Total Capital Funding 

    The following table details available capital funding over the five-year period:

    Table 8 Summary Capital Funding

    2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27 TOTAL
    £m £m £m £m £m £m
    Capital Grant 1.000 1.000
    Capital Receipts 0.139 1.542 2.000 3.681
    Capital Reserves 3.603 10.936 2.143 16.682
    Earmarked Reserves 0.254 0.254
    Revenue Contributions 4.000 3.200 3.200 2.700 2.700 15.800
    8.857 14.275 6.885 2.700 4.700 37.417

     Summary Programme

    Based on the draft capital programme as presented we have a shortfall of £9.5m:

    Table 9 Summary Capital Requirements and Funding Available

    2022/23 (inc Slippage) 2023/24 2024/25 2025/26 2026/27 TOTAL
    £m £m £m £m £m £m
    Capital Requirements 8.857 14.275 11.480 10.082 2.210 46.905
    Capital Funding 8.857 14.275 6.885 2.700 4.700 37.417
    Surplus/(Shortfall) (4.595) (7.382) 2.490 (9.487)

    This a very large funding gap, demonstrating that the programme as set out is not achievable without significant borrowing.

    Impact on the Revenue budget

    The capital programme shows the Authority utilising all of its capital reserves and receipts part way through 2024/25, meaning that the remainder of the capital programme will need to be met from either capital grant (if available), additional revenue contributions or from new borrowing.

    Any borrowing will impact the revenue budget as capital financing (interest payable and Minimum Revenue Provision – MRP) charges. As we have already set aside funds (prepaid MRP) to offset our existing £2.0m of PWLB borrowing we would need to take out new borrowing of £7.5m. This has a significant impact on the revenue budget, in terms of interest payments and setting aside a sum equivalent to the Minimum Revenue Provision (MRP), as shown in the table below.  (Note both the interest rate and the life over which MRP is charged are subject to change.)

    Table 10 Cost of Borrowing

    25 Year
    2.0%
    Interest per annum £150k
    MRP £300k
    £450k

    The revenue budget, reported elsewhere on the agenda, incorporates £0.4m in future years budgets reflecting the need to borrow.

    Programme Assumptions

    It is also worth highlighting that the programme is based around a number of assumptions which could change: –

    • All costings are subject to refinement during the design and procurement phases;
    • Vehicle replacements are based on the Fleet Asset management Plan, however the scale of replacements in 22/23 is extremely high and hence some slippage is likely
    • New Dimensions vehicle replacements are expected to be carried out by Government, however this position may change;
    • No allowance has been made for developments in operational equipment, which may justify future investments. At the present time this would need to be met from the Innovation reserve, of which we have £0.25m remaining, or from the revenue budget (there is £0.2m of revenue budget available for this type of R&D investment);
    • ICT software replacements are subject to review prior to replacement, which has led in the past to significant slippage;
    • Operational Communications replacements (ESMCP) are subject to a great deal of uncertainty in terms of both timing and costs as they are related to a national replacement project, in addition there may be grant funding available for this which is also unknown at this time;
    • The costs and timing for investment in STC Props and replacement of Preston and Fulwood Fire Stations and SHQ relocation are estimates only at this stage, based on current information, but clearly if/when any of these go ahead this will create a need for external borrowing;
    • Capital grant may be made available in future years, in order to assist service transformation and greater collaboration, although this is felt to be unlikely.

    Summary

    Without borrowing the current programme is not balanced, as such the Authority will need to borrow £7.5m over the life of the programme. The cost of this borrowing is incorporated into the revenue budget in future years, which shows a balanced position throughout the medium-term planning period. Therefore, the Treasurer considers that the programme is prudent, sustainable and affordable.

    As noted above, should any of the funding assumptions or expenditure items within the programme change, this will have an impact on the overall affordability of the programme. 

    Prudential Indicators

    The Prudential Code gives the Authority increased flexibility over its level of capital investment and much greater freedom to borrow, should this be necessary, to finance planned expenditure.  However, in determining the level of borrowing, the Authority must prepare and take account of a number of Prudential Indicators aimed at demonstrating that the level and method of financing capital expenditure is affordable, prudent and sustainable.  These Indicators are set out at Appendix 1, along with a brief commentary on each. The Prudential Indicators are based on the programme set out above.   These indicators will be updated to reflect the final capital outturn position and reported to the Resources Committee at the June meeting. 

    The main emphasis of these Indicators is to enable the Authority to assess whether its proposed spending and its financing is affordable, prudent and sustainable and in this context, the Treasurer’s assessment is that, based on the indicators, this is the case for the following reasons: –

    • In terms of prudence, the level of capital expenditure, in absolute terms, is considered to be prudent and sustainable at an annual average of £11.6m over the 3-year period.  The trend in the capital financing requirement and the level of external debt are both considered to be within prudent and sustainable levels.  Whilst new borrowing is required this only occurs at the tail end of the third year of the programme.
    • In terms of affordability, the negative ratio of financing costs is attributable to  interest receivable exceeding interest payable and Minimum Revenue Provision payments in each of the three years.  This reflects the effect of the previous decision to set aside monies to repay debt. 

    Capital Expenditure and Financing

    The objective in consideration of the affordability of the Authority’s capital plans is to ensure that total capital expenditure remains within sustainable limits.

    Capital expenditure 2020/21 to 2024/25

    The actual expenditure for 2020/21 and forecast expenditure 2021/22, and estimates of capital expenditure to be incurred in future years, as per the proposed capital programme and allowing for slippage from the 2021/22 programme, are:

    Table 12 Capital expenditure by year

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Capital Expenditure 2.654 4.451 8.857 14.275 11.480

     

    This indicator for 2021/22 will also be updated at the year-end to reflect actual capital expenditure incurred.

    Capital financing 2020/21 to 2024/25

    All capital expenditure must be financed, either from external resources (government grants and other contributions), the Authority’s own resources (revenue contributions, reserves and capital receipts) or debt (borrowing, leasing and Private Finance Initiative).  The planned financing of the above expenditure is as follows: 

    Table 13 Capital financing by year

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Grants and Contributions 1.000
    Own Resources 2.654 4.451 7.857 14.275 6.885
    Debt 4.595
    Total 2.654 4.451 8.857 14.275 11.480

    Borrowing Strategy

    Capital Financing Requirement (CFR) 2020/21 to 2024/25

    Table 14 Capital financing requirements  by year

     

     

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Capital Financing Requirement (Debt only) 4.595

    The capital financing requirement measures the authority’s underlying need to borrow for a capital purpose and reflects the effects of previous investment decisions as well as future planned expenditure.  In accordance with best professional practice, the Authority does not associate borrowing with particular items or types of expenditure. External borrowing arises as a consequence of all the financial transactions of the Authority and not simply those arising from capital spending, but in the medium term the Treasurer anticipates that borrowing is undertaken for capital purposes only.   These capital financing requirements then feed through into the anticipated level of external debt as reported in the Treasury Management Strategy elsewhere on the agenda but repeated here for completeness. As reported in the Treasury Management Strategy the Authority has made additional MRP provisions since 2010/11 in order to reduce capital financing requirements to nil.

    Authorised limit and operational boundary for its total external debt

    In respect of its external debt the Authority is required to set two limits over the three-year period: an authorised limit and an operational boundary. Both are based on the planned capital expenditure, estimates of the capital financing requirement and estimates of cash flow requirements for all purposes. It should be noted that these limits have then been uplifted to include potential borrowing associated with a future decision to go ahead with a replacement Headquarters.

    The operational boundary is based on the most likely, but not worst case, scenario and represents the maximum level of external debt projected by these estimates. However, unexpected cashflow movements can occur during the year and some provision needs to be made in setting the authorised limit to deal with this.

    The two indicators are as follows:

    Table 15 Borrowing Limits by year

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Authorised Limit for External Debt
    Borrowing       6.000       6.000       6.000       6.000       10.000
    Other long-term liabilities     30.000     30.000     30.000     30.000     30.000
    Total    36.000     36.000     36.000     36.000     40.000
    Operational Boundary for External Debt          
    Borrowing       3.000       3.000       3.000       3.000       8.000
    Other long-term liabilities     17.000     17.000   16.000   15.000     15.000
    Total    20.000   20.000   19.000   18.000     23.000

    Gross debt and the Capital Financing Requirement

    The Prudential Code requires that debt does not exceed the Capital Financing Requirement except in the short term, in order to ensure that over the medium term that debt will only be for capital purposes.  This is a key indicator of prudence.

    As reported in the Treasury Management Strategy, the Authority has made additional MRP provisions since 2010/11 in order to reduce Capital Financing Requirements and hence the charges associated with this, and in order to set monies aside to pay off debt as it matures. It used these monies to pay off £3.2m of debt in October 2017. As a result of this the level of debt now held, £2.0m, exceeds the capital financing requirement, has been zero after MRP payments made during 2019/20: –

     Table 16 Debt and the Capital Financing Requirements by year

     

     

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Debt 2.000 2.000 2.000 2.000 2.000
    Capital Financing Requirement 4.595

    Revenue Budget Implications

    Although capital expenditure is not charged directly to the revenue budget, interest payable on loans and Minimum Revenue Provision (MRP, or debt repayments) are charged to revenue, offset by interest receivable.  The net annual charge is known as financing costs.

    As shown within the Treasury Management Strategy report elsewhere on the agenda, the financing costs are as follows: 

    Table 17 Impact on Revenue Budget by year

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    £m £m £m £m £m
    Interest payable 0.090 0.090 0.090 0.090 0.090
    MRP 0.010 0.010 0.010 0.010 0.010
    Interest receivable (0.253) (0.194) (0.300) (0.200) (0.100)
    Net financing costs (0.153) (0.094) (0.200) (0.100)

    Proportion of financing costs to net revenue stream

     Table 18 Proportion of financing costs to net revenue stream by year

    2020/21

    Actual

    2021/22

    Forecast

    2022/23

    Estimate

    2023/24

    Estimate

    2024/25

    Estimate

    Net financing costs (£0.153m) (£0.094m) (£0.200m) (£0.100m)
    Ratio of Financing Costs to Net Revenue Stream (0.27%) (0.16%) (0.32%) (0.16%)

    The negative percentage of this indicator reflects the low level of underlying debt (following the repayment of the majority of our long-term loans during 2017/18) for the Authority in comparison to the authority’s level of investment income, i.e. interest receivable is greater than interest payable. 

  • Reserves and balances policy 2022/23-2025/26

    The National Framework includes a section on reserves. The main components of which are:

    • General reserves should be held by the fire and rescue authority and managed to balance funding and spending priorities and to manage risks. This should be established as part of the medium-term financial planning process.
    • Each fire and rescue authority should publish their reserves strategy on their website. The reserves strategy should include details of current and future planned reserve levels, setting out a total amount of reserves and the amount of each specific reserve that is held for each year. The reserves strategy should provide information for at least two years ahead.
    • Sufficient information should be provided to enable understanding of the purpose for which each reserve is held and how holding each reserve supports the fire and rescue authority’s medium-term financial plan.
    • Information should be set out in a way that is clear and understandable for members of the public, and should include:
      • how the level of the general reserve has been set;
      • justification for holding a general reserve larger than five percent of budget;
      • whether the funds in each earmarked reserve are legally or contractually committed, and if so, what amount is so committed; and
      • a summary of what activities or items will be funded by each earmarked reserve, and how these support the fire and rescue authority’s strategy to deliver good quality services to the public.

    The reserves policy complies with these requirements.

    General Reserves (General Fund)

    These are non-specific reserves which are kept to meet short/medium term unforeseeable expenditure and to enable significant changes in resources or expenditure to be properly managed in the medium term.

    The Authority needs to hold an adequate level of general reserves to provide: –

    • A working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing;
    • A contingency to cushion the impact of unexpected events;
    • A means of smoothing out large fluctuations in spending requirements and/or funding available.

    The following table sets out the purpose of this reserve, how it is utilised, controlled and reviewed.

    Table 2 Summary of General Reserves (General Fund)

    Name General Reserves (General Fund)
    Purpose This covers uncertainties in future years budgets, such as:

    future grant settlements being lower than forecast;

    • higher levels of inflation than budgeted;
    • increasing cost of and changes to pensions;
    • service demands increasing, putting additional pressure on demand led budgets;
    • changes in legislation impacting on future service provision;
    • potential cost of industrial action.
    Utilisation This is utilised to offset any in-year overspend that would occur when comparing budget requirement to the level of funding generated.
    Controls The utilisation of this is agreed as part of the annual budget setting process.  Any further utilisation requires the approval of the Resources Committee.
    Review The adequacy of this is reviewed annually, as part of the budget setting process.

    Review of Level of Reserves

    In determining the appropriate level of general reserves required by the Authority, the Treasurer is required to form a professional judgement on this, taking account of the strategic, operational and financial risk facing the Authority.  This is completed based on guidance issued by CIPFA and includes an assessment of the financial assumptions underpinning the budget, the adequacy of insurance arrangements and consideration of the Authority’s financial management arrangements. In addition, the assessment should focus on both medium and long-term requirements, taking account of the Medium-Term Financial Strategy (as set out in the draft budget report elsewhere on this agenda).

    For Lancashire Combined Fire Authority this covers issues such as: uncertainty surrounding future funding settlements and the potential impact of this on the revenue and capital budget; uncertainty surrounding future pay awards and inflation rates; the impact of changes to pension schemes and the remedy for the McCloud judgement; demand led pressures; risk of default associated with our investments as set out in the Treasury Management Strategy, cost associated with maintaining operational cover in the event of Industrial Action etc.

    There remains a great deal of uncertainty over long term funding than in recent years as the impact of both Brexit and the Pandemic on public finances and the national economy are still unknown. As a result, the anticipated multi-year settlement has been postponed again, hence the draft settlement only covers 22/23. As a result of the Local Government Finance Settlement the Authority will receive a 1.1% inflationary increase for 2022/23.

    Furthermore, the outcome of the fair funding review of relative needs and resources and the Government intention to move to greater retention of Business Rates have also been postponed, and hence are likely to take effect over the next settlement period, which we are anticipating will be a multi-year settlement.

    The position in terms of pension costs is also extremely uncertain with guidance relating to Immediate Detriment being issued, and subsequently withdrawn and with there being no clear decision as to where the costs of implementing this will fall.

    As such the Treasurer considers it prudent to increase the minimum target reserves level to £4.0m, 6.5% of the 2022/23 net revenue budget, reflecting the increasing level of uncertainty. This is slightly higher than the 5% threshold identified by the Home Office above which the Authority is required to justify why it holds the level of reserves, reflecting the increasing uncertainty about future funding, pension costs and pay awards.

    Should reserves fall below this minimum level the following financial year’s budget will contain options for increasing reserves back up to this level.  (Note, this may take several years to achieve.)

    Whilst this exercise sets a minimum level of reserves it does not consider what, if any, maximum level of reserves is appropriate. In order to do this the level of reserves held should be compared with the opportunity cost of holding these, which in simple terms means that if you hold reserves that are too high you are foregoing the opportunity to lower council tax or invest in further service improvements.

    Whilst the settlement provides greater flexibility to increase council tax in 22/23, this is a one-off relaxation of the referendum principles and will not be repeated in future years. Hence the scope to increase council tax in future years to restore depleted reserves is limited, without holding a local referendum. Therefore, any maximum reserve limit must take account of future anticipated financial pressures and must look at the long-term impact of these on the budget and hence the reserve requirement. Based on professional judgement, the Treasurer feels that this should be maintained at £10.0m.

    Should this be exceeded the following financial year’s budget will contain options for applying the excess balance in the medium term, i.e. over 3-5 years.

    Level of General Reserves

    The overall level of the general fund balance, i.e., uncommitted reserves, anticipated at the 31 March 2022 is £6.0m, providing scope to utilise approx. £2.0m of reserves.

    The draft budget as presented elsewhere on the agenda does not require any drawdown of reserves in 22/23. The Treasurer therefore considers this reserve is at an appropriate level.

    Looking at the medium term the need to drawdown reserves will be affected by:-

    • Council tax – The revenue budget assumes that council tax is increased by the maximum permissible each year, enabling the Service to deliver a balanced budget each year. If this is not the case, then we may need to utilise reserves in future years to balance the budget.
    • Emergency Cover Review (ECR) – The revenue budget assumes that the outcome of the ECR is cost neutral. If this was not the case and the ECR/cessation of DCP required significant investment, then we would need to utilise reserves to fund this
    • Pension costs – the revenue budget assumes that the only pension costs that fall on the Service are employer contributions, and that all other costs are met by the Government via the Pension Holding Account. If this is not the case, then reserves would be required to meet these one-off costs which will be very significant
    • Future funding – The revenue budget assumes future funding increases by 1% each year, in line with this year’s settlement. If that is not the case and it is frozen, this would reduce funding levels by £0.3m, if that was the case for 4 years the cumulative effect would be a £1m reduction in overall funding, which may impact on the need to drawdown reserves
    • Future inflation – The revenue budget assumes future inflation, including pay awards, returns to the Government’s 2% target. If this is not the case each 1% more than this increases the recurring budget requirement by £0.5m, i.e. £2.5m over the next 5 years, which may impact on the usage of reserves

    Earmarked Reserves

    These are reserves created for specific purposes to meet known or anticipated future liabilities and as such are not available to meet other budget pressures. They can only be used for that specific purpose, for which they were established, and as such it is not appropriate to set any specific limits on their level, but as part of the annual accounts process their adequacy will be reviewed and reported on.

    The following table sets out the purpose of this reserve, how it is utilised, controlled and reviewed.

    Table 3 Summary of Earmarked Reserve

    Name Earmarked
    Purpose This covers monies set aside for specific purposes.
    Utilisation Once set up these reserves can only be used for the specific purpose for which they were established.
    Controls The utilisation of these are discussed at quarterly DFM meetings between the budget holder, relevant Executive Board member, and the Director of Corporate Services.
    Review The level of earmarked reserves is reviewed each year as part of the revenue outturn/annual accounts process to ensure these are reasonable and remain relevant.

    The Director of Corporate Services has delegated authority to create new earmarked reserves valued at up to £100,000; any request which exceeds this must be reported to the Resources Committee for approval.

    Specific earmarked reserves will be closed when there is no longer a requirement to hold them, at which point they will either hold a nil balance or when any outstanding balance will be transferred into the general reserve.

    Level of Earmarked Reserves

    The following table provides a breakdown of the £9.3m of earmarked reserves forecast to be held at 31st March 2022, and a forecast of the anticipated position as at 31 March 2027: –

    Table 4 Earmarked Reserve Balances

    Forecast at 31 March 2022 Forecast at 31 March 2027
    £m £m
    Section 21 Business Rate Relief Grant 1.1 Last year the Government provided Section 31 Rate Relief grant to individual billing authorities, to cover the additional in-year reliefs provided because of the pandemic. Business rates are split between the Government, billing authorities, Lancashire County Council and ourselves, we receive 1% of the total. As such this grant should be split in line with business rates. However, the Govt allocated all of this to billing authorities to aid cash flow, with the correct distribution anticipated in 21/22, once the outturn business rates position has been agreed.   As such we accrued for our anticipated share of this in 20/21 but needed to carry this forward via this reserve to meet the business rate collection fund shortfall that has arisen due to these additional reliefs. Whilst this has been fully utilised in 21/22 the exercise has been repeated and hence a balance of £1.1m needs to be carried forward to meet the collection fund deficit in 22/23

    This will be fully utilised in the new financial  year.

    C/Fwd Underspend Relating to Timing of Activities 0.3 Within the revenue budget there were several items that were delayed by the pandemic, and which therefore needed funding carried forward from 20/21 to 21/22. These related to areas such as fire safety, training provision, property maintenance, organisational development and Digital transformation, and are purely a timing issue.

    We have utilised some of these funds in the current financial years, we have reviewed the need and timing of remaining items, with £0.3m transferring into the capital reserve. This leaves a balance of £0.3m which will be utilised over the next 2 years.

    There are no contractual or legal obligations against this reserve.

    Specific Grant C/Fwd. 0.1 This reserve carries forward unspent specific grants provided in 20/21 in respect of

    • Protection Uplift Grant
    • Building Risk Review Grant
    • Grenfell Infrastructure Grant
    • ESMCP Grant

    We anticipated utilising the majority of these in the current financial year with any balance being utilised next year.

    There are no contractual or legal obligations against this reserve

    Covid Funding This reserve carried forward the balance of Covid funding provided by the Government which had not bene utilised by 31 March 2021. This has been fully utilised in the current financial year.
    DFM Reserve 0.2 0.2 Devolved Financial Management Reserve enables budget holders to carry forward any surplus or deficit from one financial year to the next, within prescribed limits.

    This reserve provides greater flexibility to individual budget holder to carry forward underspends within their own budget area to meet future costs and optimise the use of resources.

    Examples of areas where these balances have been used previously would-be one-off replacements of equipment, or enhancement to station facilities etc.

    The levels of individual DFM reserves are reviewed each year as part of the revenue outturn/annual accounts process, to ensure that they are reasonable and that budget holders are not building up excessive reserves. As a result of this exercise we have stripped out £0.1m and transferred this into the capital funding reserve (referred to later in the report)

    At present there are no contractual or legal obligations against this reserve, as any such commitments would be included in the base revenue budget.

    PFI Reserves 5.2 4.0 Private Finance Initiative Reserve, which is used to smooth out the annual net cost to the Authority of the existing PFI scheme, and will be required to meet future contract payments. The utilisation of this is set out in the budget agreed at the start of the year, any variance in requirements from this are agreed by the Treasurer as part of the budget setting/revenue outturn/annual accounts processes.

    The inflationary impact on these schemes is recalculated each year , based on March’s RPI. Whilst this exercise has not taken place yet RPI is at its highest level for many years and is significantly above the 3% allowance built into the PFI model. As such we have adjusted the model to allow for a 5% increase in 22/23, which results in a £0.5m increase in the reserve requirement. (Note a further adjustment will be required if the eventual inflationary impact is higher than this).

    The reduction of this reserve in subsequent years reflecting its drawdown to offset future charges.

    Assuming RPI returns to 3% in future years the whole of this reserve is contractually committed over the next 20 years.

    Insurance Aggregate Stop Loss (ASL) 1.1 1.1 The Authority has aggregate stop losses (ASLs) on both its combined liability insurance policy (£0.4m) and its motor policy (£0.3m). This means that in any one year the Authority’s maximum liability for insurance claims is capped at the ASL. As such the Authority can either meet these costs direct from its revenue budget or can set up an earmarked reserve to meet these. Within Lancashire we have chosen to meet the potential costs through a combination of the two. Hence the amount included in the revenue budget reflects charges in a typical year, with the reserve being set up to cover any excess over and above this. As such the reserve, combined with amounts within the revenue budget, provides sufficient cover to meet 2 years’ worth of the maximum possible claims, i.e. the ASL. (It is worth noting that the revenue budget allocation has also been reduced in recent years reflecting the claims history. Without holding this reserve to cushion any major claims that may arise this would not have been possible.)

    None of this reserve is legally committed at the present time, although as soon as a claim arose this position would change.

    Prince’s Trust 0.5 0.5 This reserve has been established to balance short term funding timing differences and to mitigate the risk of loss of funding and enable short term continuation of team activities, whilst alternative funding is found.

    Without this reserve any significant loss of funding would have an immediate impact on our ability to deliver the PT programme, and hence improve the lives of younger people.

    This reserve has been capped at £0.5m.

    There are no legal or contractual commitments against this, however forecasts show this budget reducing reflecting the uncertainty over future funding

    Apprentices 0.1 This reserve was created from previous in-year underspends relating to the appointment of apprentices, which was delayed awaiting national developments.

    As such the reserve was set up to offset some of the pay/training costs that will be incurred in future years, with the balance being met direct from the revenue budget.

    This clearly contributes to addressing apprenticeship targets, set by the Government, as well as addressing capacity issues within departments.

    There are no contractual commitments against this.

    Fleet & Equipment 0.2 This reserve was created to meet the cost of replacement projects which were not completed by year end. We anticipate fully utilising this in 22/23 to contribute towards the cost of intruding wildfire PPE across the Service.

    There are no contractual or legal commitments against this at the present time.

    Innovation Fund 0.5 0.2 The Authority created an Innovations Fund to meet costs arising from new initiatives/developments which improve service delivery or fire fighter safety but which are not included in the capital programme.

    Any requests to utilise the fund require the approval of the Executive Board.

    The capital program shows £0.25m of this being utilised in 23/24 to fund the provision of a second Vehicle Mounted Data Systems (VMDS) unit in each fire appliances, thus enhancing the capabilities of crews whilst mobile.

    If the opportunity arises this will be topped up from future savings.

    None of this reserve is contractually or legally committed at the present time.

    9.3 6.1

    It is worth noting that of the anticipated balance of £6.1m at 31 March 2027, £4.0m (66%) of this relates to the PFI reserve.

    Based on this the Treasurer believes these are adequate to meet future requirements in the medium term.

    Capital Reserves and Receipts

    Capital Reserves have been created from under spends on the revenue budget to provide additional funding to support the capital programme in future years; as such they cannot be used to offset any deficit on the revenue budget, without having a significant impact on the capital programme that the Authority can support.

    Capital Receipts are generated from the sale of surplus assets, which have not yet been utilised to fund the capital programme. Under revised regulations receipts generated between April 2016 and March 2020 can be used to meet qualifying revenue costs, i.e. set up and implementation costs of projects/schemes which are forecast to generate on-going savings. The on-going costs of such projects/schemes do not qualify. Whilst the Authority currently holds £1.7m of capital receipts only £0.2m of this arose in the relevant period. Given the small amount eligible we do not currently have any plans to use this in line with new regulations and hence for the purpose of planning all capital receipts will be used to meet future capital costs, not qualifying revenue expenditure.

    The following table sets out the purpose of this reserve, how it is utilised, controlled and reviewed.

    Table 5 Summary of Capital Reserves and Receipts

    Name Capital reserves and receipts
    Purpose This covers monies set aside to fund the future capital programme.
    Utilisation Once set up these reserves can only be used to fund capital expenditure
    Controls The proposed utilisation of these is reported to the Authority as part of the capital programme setting and monitoring arrangements.
    Review These are reviewed on an annual basis as part of the year end outturn, reported to Resources Committee and as part of the capital budget setting report to the Authority.

     At 31 March 2022 the Authority anticipates holding £18.4m of capital reserves and receipts, after  allowing for the transfer of £0.4m of earmarked reserves and £0.4m of the year end revenue underspend. Based on the capital programme presented elsewhere on this agenda we anticipate fully utilising these by 31 March 2025. Of the total reserve £1.5m is contractually committed.

    Based on this the Treasurer believes these are adequate to meet future requirements in the short to medium term, but recognises that they will be exhausted March 2025.

    Provisions

    The Authority has two provisions to meet future estimated liabilities: –

    Insurance Provision

    This covers potential liabilities associated with outstanding insurance claims. Any claims for which we have been notified and where we are at fault will result in a legal commitment, however as the extent of these cannot be accurately assessed at the present time this provision is created to meet any element of cost for which we are liable, i.e. which are not reimbursable from insurers as they fall below individual excess clauses and the annual self-insured limits. This provision fully covers all estimated costs associated with outstanding claims.

    The following table sets out the purpose of this provision, how it is utilised, controlled and reviewed.

    Table 6 Summary of Insurance Provision

    Name Insurance Provision
    Purpose This covers monies set aside to meet future insurance claims.
    Utilisation Once set up the provision can only be utilised to meet insurance claims.
    Controls The utilisation of these are reported on an annual basis as part of the year end outturn report presented to Resources Committee.
    Review The level of the provision is reviewed annually based on existing and anticipated outstanding insurance claims to ensure these are reasonable and remain relevant.

    This provision stood at £0.5m at 31 March 2021. Given the uncertainty in terms of future insurance claims we have assumed that the provision will be maintained at this level throughout the 5-year period. There are no existing legal obligations associated with this provision, as the legal obligation only arises when settlement of outstanding claims is agreed.

    Business Rates Collection Fund Appeals Provision

    This covers the Authority’s share of outstanding appeals against business rates collection funds, which is calculated each year end by each billing authority within Lancashire based on their assumptions of outstanding appeal success rates, as part of their year-end accounting for the business rates collection fund.

    The following table sets out the purpose of this provision, how it is utilised, controlled and reviewed.

    Table 7 Summary of Business Rates Collection Fund Appeals Provision

    Name Business Rates Collection Fund Appeals Provision
    Purpose This covers monies set aside to meet the Authority’s share of the cost of successful business rates appeals.
    Utilisation Once set up the provision can only be utilised to meet costs associated with settlement of such appeals.
    Controls The utilisation of these are reported on an annual basis as part of the year end outturn report presented to Resources Committee.
    Review The level of the provision is reviewed annually based on each billing authority’s assumptions regarding success rates to ensure these are reasonable and remain relevant.

    At 31 March 2021 this provision stood at £1.1m to cover anticipated costs of outstanding business rates appeals. Whilst a significant element of this will be utilised in the current financial year, reflecting the settlement of outstanding appeals, it is impossible to accurately predict the extent of this usage or the need for any additional provision to meet appeals that arise in year, until such time as a full review is undertaken by billing authorities as part of the financial year end process. Therefore, for the purpose of this report we have assumed that the level of business rates appeals provision remains unchanged. Until the outcome of any appeal is known there is no legal obligation arising from the appeal.

    The Treasurer feels that the levels of provisions are sufficient to meet future requirements in the medium term.

    Summary Reserve Position

    The following table sets out the summary anticipated position in terms of reserves and balances, a more detailed year on year analysis by reserve is attached as appendix 1: –

    Table 8 Summary Use of Reserves March 21 to March 27

    General Reserve Earmarked Reserve Capital Reserves & Receipts Total Usable Reserves Provisions Total Reserves & Balances
    £m £m £m £m £m £m
    Balance 31/3/21 6.0 10.8 19.6 36.5 1.6 38.0
    Change in year 0.0 (1.5) (1.3) (2.7) 0.0 (2.7)
    Balance 31/3/22 6.0 9.3 18.4 33.7 1.6 35.3
    Change in year 0.0 (2.1) (3.6) (5.7) 0.0 (5.7)
    Balance 31/3/23 6.0 7.3 14.8 28.1 1.6 29.6
    Change in year 0.0 (0.4) (11.1) (11.4) 0.0 (11.4)
    Balance 31/3/24 6.0 6.9 3.7 16.6 1.6 18.2
    Change in year 0.0 (0.3) (3.7) (3.9) 0.0 (3.9)
    Balance 31/3/25 6.0 6.6 0.0 12.7 1.6 14.2
    Change in year 0.0 (0.2) 0.0 (0.2) 0.0 (0.2)
    Balance 31/3/26 6.0 6.4 0.0 12.4 1.6 14.0
    Change in year 0.0 (0.3) 0.0 (0.3) 0.0 (0.3)
    Balance 31/3/27 6.0 6.1 0.0 12.2 1.6 13.7

    The level of reserves reduces by over £20m over the next 3 financial years, reflecting the scale of the capital programme. Our general reserve remains above our minimum requirement throughout the period, reflecting the increase in council tax included in the revenue budget report. The position will be subject to significant change as pension costs, funding, inflation, pay awards etc become clearer in future years. The annual refresh of this policy will identify the impact of any changes as they develop.

  • Treasury Management Strategy 2020/21

    Treasury Management is defined as “The management of the Authority’s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

    The Local Government Act 2003 (the Act) and supporting Regulations requires the Authority to “have regard to” the CIPFA Prudential Code and the CIPFA Treasury Management Code of Practice to set Prudential and Treasury Indicators for the next three years to ensure that the Authority’s capital investment plans are affordable, prudent and sustainable. The Code also  requires the Authority to approve a treasury management strategy before the start of each financial year.  The authority also adheres to investment guidance issued by the then Ministry of Housing, Communities and Local Government (MHCLG).

    The definition of investments in the codes is wide raging and includes non-treasury investments for example loans to third parties and the holding of property to make a profit. Where these are held a separate strategy is required. However, it is not considered that the Combined Fire Authority hold any such assets and it does not propose to engage in any such investments in 2022/23.

    Treasury Management Strategy for 2022/23

    This Strategy Statement has been prepared in accordance with the CIPFA Treasury Management Code of Practice.  Accordingly, the Lancashire Combined Fire Authority’s Treasury Management Strategy will be approved by the full Authority, and there will also be a mid-year and a year-end outturn report presented to the Resources Committee. In addition, there will be monitoring and review reports to members in the event of any changes to Treasury Management policies or practices.  The aim of these reporting arrangements is to ensure that those with ultimate responsibility for the treasury management function appreciate fully the implications of treasury management policies and activities, and that those implementing policies and executing transactions have properly fulfilled their responsibilities with regard to delegation and reporting.

    This Authority has adopted the following reporting arrangements in accordance with the requirements of the revised Code: –

    Table 2 Treasury Management reporting arrangements

    Area of Responsibility Committee/ Officer Frequency
    Treasury Management Policy Statement Resources

    Committee/Authority

    Annually
    Treasury Management Strategy

    / Annual Investment Strategy / MRP policy – scrutiny and approval

    Resources Committee/

    Authority

    Annually before the start of the year
    Treasury Management mid-year report, Resources

    Committee

    Mid-year
    Treasury Management Strategy

    / Annual Investment Strategy / MRP policy – updates or revisions at other times

    Resources

    Committee

    As required
    Annual Treasury Management Outturn Report Resources Committee/

    Authority

    Annually by 30 September after the end of the year
    Treasury Management Monitoring Reports Director of

    Corporate Services

    Quarterly
    Treasury Management Practices Director of

    Corporate Services

    Annually

    The Treasury Management Strategy, covers the following aspects of the Treasury Management function:-

    • Prudential Indicators which will provide a controlling framework for the capital expenditure and treasury management activities of the Authority;
    • Current Long-term debt and investments;
    • Prospects for interest rates;
    • The Borrowing Strategy;
    • The Investment Strategy;
    • Policy on borrowing in advance of need.

    Setting the Treasury Management Strategy for 2022/23

    In setting the treasury management strategy the following factors need to be considered as they may have a strong influence over the strategy adopted:

    • economic position and forecasts,
    • Interest rate forecasts
    • the current structure of the investment and debt portfolio
    • Future Capital Programme and underlying cash forecasts

    Economic background:

    The treasury management activity will be influenced by the forecast of interest rates for the year. In December 2021 the Bank of England increased the Bank Rate by 0.15% to 0.25%. This increase is the first in over 3 years and was made in response to inflationary pressures.  This was followed by a further 0.25% increase in February to give a base rate of 0.5%. The November inflation rate, as measured by Consumer Prices Index (CPI) was 5.1% which was the highest for a decade and the Bank of England forecasts suggest it may rise to 6% or 7% in the first few months of 2022.

    Gross domestic product (GDP) grew by 1.3% in the third calendar quarter of 2021 according to the initial estimate, compared to a gain of 5.5% in the previous quarter, with the annual rate slowing to 6.6%.  Activity was boosted by sectors that reopened following coronavirus pandemic restrictions. However, looking ahead there is a great deal of uncertainty around the impact on the economy.

    A similar picture has occurred in many different areas of the world including the USA. Currently the Federal Reserve has continued to maintain the Fed Funds rate at between 0% and 0.25% but signalled they are in favour of tightening interest rates at a faster pace in 2022, with three 0.25% movements now expected.

    Arlingclose Forecast

    The Authority’s treasury management adviser Arlingclose had already forecast that Bank Rate would rise to 0.50% in the first quarter of 2022 to subdue inflationary pressures and the perceived desire by the BoE to move away from emergency levels of interest rates. Following the actual base rate increase they have updated their forecasts as set out below, which shows a further predicted increase to 1.0% in the first half of the new financial year.

    Table 3 Forecast interest rates

    Bank Rate % 3 month money market rate% 5 year gilt yield % 10 year gilt yield % 20 year gilt yield % 50 year gilt yield %
    Mar-22 0.75 0.85 1.20 1.35 1.55 1.20
    Jun-22 1.00 1.20 1.20 1.35 1.55 1.20
    Sep-22 1.00 1.25 1.20 1.35 1.55 1.20
    Dec-22 1.00 1.15 1.20 1.35 1.55 1.20
    Mar-23 1.00 1.10 1.20 1.35 1.55 1.20
    Jun-23 1.00 1.10 1.20 1.35 1.55 1.20
    Sep-23 1.00 1.10 1.15 1.35 1.55 1.20
    Dec-23 1.00 1.10 1.15 1.35 1.55 1.20
    Mar-24 1.00 1.10 1.15 1.35 1.55 1.20
    Jun-24 1.00 1.10 1.15 1.35 1.55 1.20
    Sep-24 1.00 1.10 1.15 1.35 1.55 1.20
    Dec-24 1.00 1.10 1.15 1.35 1.55 1.20

    Gilt yields are expected to remain broadly at current levels over the medium-term, with the 5, 10 and 20 year gilt yields expected to average around 0.65%, 0.90%, and 1.15% respectively. The risks around for short and medium-term yields are initially to the upside but shifts lower later, while for long-term yields the risk is to the upside. However, as ever there will almost certainly be short-term volatility due to economic and political uncertainty and events. (In the above table ‘bank rate’ refers to the policy rate of the Bank of England. PWLB borrowing rates are based on ‘Gilt Yield’ and so this is a forecast of long-term interest rates. The Authority can borrow at 80 basis points above the gilt yield, so for example a fixed interest rate to borrow PWLB money for 10 years would be 1.65%, 0.85% plus 0.80%.)

    Current Treasury Portfolio Position

    At the 31 December 2021 the debt and investments balances were: –

    Table 4 Debt and Investments balances

    Debt Principal

    £m

    %
    Fixed rate loans from the Public Works Loan Board 2.000 100%
    Variable rate loans
    2.000 100%
    Investments
    Variable rate investments with Lancashire County Council 22.400 69%
    Fixed rate investments 10.000 31%
    32.400 100%

    The level of investments represents the Authority’s cumulative surplus on the General Fund, the balances on other cash-backed earmarked reserves and a cash-flow balance generated by a surplus of creditors over debtors and by grant receipts in advance of payments. There is a net investment figure of £30m.

    Borrowing and Investment Requirement

    In the medium term LCFA borrows for capital purposes only. The underlying need to borrow for capital purposes is measured by the Capital Financing Requirement (CFR), while usable reserves and working capital are the underlying resources available for investment. The table below compares the estimated CFR to the debt which currently exists, this gives an indication of the borrowing required. It also shows the estimated resources available for investment. An option is to use these balances to finance the expenditure rather than investing, often referred to as internal borrowing. The table gives an indication of the minimum borrowing or investment requirement through the period.

    The CFR forecast includes the impact of the latest forecast of the funding of the Capital Programme which currently assumes that there will be no borrowing until 2024/25 (note borrowing only affects the CFR the year after it is taken out). A voluntary MRP was made in 2019/20 to take the future loans element of the MRP to nil.

    Table 5 Borrowing/Investment Need

    1/4/2021 1/4/2022 1/4/2023 1/4/2024
    £m £m £m £m
    Capital Financing Requirement 13.377 12.930 12.439 11,918
    Less long-term liabilities (PFI and finance leases) (13.377) (12.930) (12.439) (11,918)
    Less external borrowing (2.000) (2.000) (2.000) (2.000)
    Borrowing requirement (2.000) (2.000) (2.000) (2.000)
    Reserves and working capital 36,460 32,040 24,443 13,400
    Borrowing/(Investment) need 34.460 30.040 22,443 11,400

     CIPFA’s Prudential Code for Capital Finance in Local Authorities recommends that the Authority’s total debt should be lower than its highest forecast CFR over the next three years. However, the table above shows that the level of loans was above the CFR at 1/4/21. This was the result of the Authority adopting a policy of setting aside additional Minimum Revenue Provision (MRP) in order to generate the cash to repay loans either on maturity or as an early repayment.

    The table above indicates that rather than having a need for borrowing it is estimated that the authority has an underlying need to invest although the available balances are forecast to reduce.

    Although the Authority does not have plans for new borrowing until 2024/25 it currently holds £2.0m of loans as part of its strategy for funding previous years’ capital programmes.

    Liability Benchmark

    The liability benchmark is an indicator suggested in the CIPFA Code. It looks to compare the Authority’s actual borrowing requirements against an alternative strategy, a liability benchmark, which shows the minimum level of borrowing. This assumes the same forecasts as the table above, but that cash and investment balances are kept to a minimum level of £10m at each year-end to maintain sufficient liquidity but minimise credit risk. In addition, it reflects the latest Capital Programme information which shows a borrowing requirement in 2024/25 and 2025/26.

    The grey line represents the need to fund capital expenditure through borrowing (the Capital Financing Requirement). The orange line represents the need to fund capital expenditure through borrowing once reserves and working capital surplus’ have been taken into account. The yellow line  represents the need to fund capital expenditure through borrowing once reserves and working capital surplus’ have been taken into account but allowing for cash and investment balances being  maintained at a minimum level of £10m at each year-end (to maintain sufficient liquidity but minimise credit risk) – this is actually the real need to borrow which CIPFA have defined as being the Liability Benchmark.

    The benchmark shows that from 2025/26 there is likely to be a long-term requirement to borrow but that this does not necessarily have  to be at the level of the loans CFR, which represents the maximum borrowing. The borrowing requirement is also reducing over time, which may influence the length and type of borrowing to be taken.

    Borrowing Strategy

    The draft Capital Programme shows a requirement to use borrowing to fund the capital programme in the later years. At this stage it is extremely unlikely that borrowing will be required in 2022/23. However, it is still best practice to approve a borrowing strategy and a policy on borrowing in advance of need.  In considering a borrowing strategy the Authority needs to make provision to borrow short term to cover unexpected cash flow shortages or to cover any change in the financing of its Capital Programme.

    In the past the Authority has raised all of its long-term borrowing from the Public Works Loan Board, but if long term borrowing was required other sources of finance, such as local authority loans, and bank loans, would be investigated that may be available at more favourable rates.

    Short-term borrowing if required would most likely be taken from other local authorities.

    Therefore, the approved sources of long-term and short-term borrowing are:

    • Public Works Loan Board
    • UK local authorities
    • any institution approved for investments
    • any other bank or building society authorised by the Prudential Regulation Authority to operate in the UK
    • UK public and private sector pension funds

    Policy on Borrowing in Advance of Need

    In line with the Prudential Code  the Authority will not borrow purely in order to profit from the investment of the extra sums borrowed. However advance borrowing may be taken if it is considered that current rates are more favourable than future rates and that this advantage outweighs the cost of carrying advance borrowing. Any decision to borrow in advance will be considered carefully to ensure value for money can be demonstrated and that the Authority can ensure the security of such funds and relationships.

    In determining whether borrowing will be undertaken in advance of need the authority will:-

    • Ensure that there is a clear link between the capital programme and the maturity profile of the existing debt portfolio which supports the need to take funding in advance of need.
    • Ensure the on-going revenue liabilities created, and the implications for the future plans and budgets have been considered.
    • Evaluate the economic and market factors that might influence the manner and timing of any decision to borrow.
    • Consider the merits and demerits of alternative forms of funding.
    • Consider the alternative interest rate bases available, the most appropriate periods to fund and repayment profiles to use.

    Debt Restructuring 

    The Authorities debt has arisen as a result of prior years’ capital investment decisions. It has not taken any new borrowing out since 2007 as it has been utilising cash balances to pay off debt as it matures, or when deemed appropriate with the authority making early payment of debt. The anticipated holding of debt at 31 March 2022 is £2.0m. All the debt is from the Public Works Loans Board (PWLB) and is all at fixed rates of interest and is repayable on maturity. The table below shows the maturity profile and interest rate applicable on these:-

    Table 6 Outstanding Loans

    Loan Amount Maturity Date Interest rate
    £650k December 2035 4.49%
    £650k June 2036 4.49%
    £700k June 2037 4.48%

    (Note, this debt was taken out in 2007 when the base rate was 5.75% and when the Authority was earning 5.84% return on its investments.)

    Given the high interest rates payable on these loans, relative to current interest rates, we have again reviewed opportunities for debt repayment/restructuring.

    The level of penalty applicable on early repayment of loans now stands at £0.813m. This is a reduction from the previous level and reflects the recent increase in base rates. (As previously reported the level of penalty is dependent upon two factors, the difference between the interest chargeable on the loan and current interest rates, the greater this difference the greater the penalty, and the length to maturity, the greater the remaining time of the loan the greater the penalty. Hence as interest rates increase or as loans get closer to maturity the level of penalty will reduce.)

    Outstanding interest payable between now and maturity is £1.317m.

    Table 7 Implications of Repaying Loans

    Penalty incurred 0.813
    Savings on interest payable (1.317)
    Gross Saving (0.504)

    However as highlighted previously, any early repayment means that cash balances available for investment will be reduced and hence interest receivable will also be reduced. The extent of which is dependent upon future interest rates. It is estimated that if interest rate on investments are at 1.7% over the remaining period of the loan, then repaying the loans now will be broadly neutral.

    It is also worth noting that the capital budget does allow for additional borrowing within the next 5 years. Current borrowing rates are between 2.0% and 2.5% for long term loans, i.e. over 10 years, and anywhere within this range exceed the breakeven position noted above. Hence given the penalties it is not considered  beneficial to repay these loans.

    Table 8 Implications of transferring loans to a new rate

    New loan @ 2.00% New loan @ 2.50%
    Penalty incurred on original loan 0.813 0.813
    Savings on interest payable on original loan (1.317) (1.317)
    Interest payable on replacement borrowing (same time period as current loans) 0.587 0.733
    Net Cost 0.083 0.229

    Investment Strategy

    At 31st December 2021 the Authority held £32.4m invested funds, representing income received in advance of expenditure plus existing balances and reserves.  During the year the Authority’s investment balance has ranged between £31.0m and £46.7m. The variation arises principally due to the timing of the receipt of government grants. It is anticipated that similar levels will be maintained in the forthcoming year.

    Both the CIPFA Code and government guidance require the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield.  The Authority’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk receiving unsuitably low investment income.

    Therefore, in line with the guidance the Treasury Management Strategy is developed to ensure the Fire Authority will only use very high quality counterparties for investments.

    The Authority may invest its surplus funds with any of the counterparties in the table below, subject to the cash and time limits shown.

     Table 9 Investment Counterparties

    Counterparty Cash limit Time limit
    Banks and other organisations and securities whose lowest published long-term credit rating from Fitch, Moody’s and Standard & Poor’s is: AAA £5m each 5 years
    AA+ 3 years
    AA 2 years
    AA- 2 years
    Call Accounts with banks and other organisations with minimum  AA-  credit rating £10m next day
    Call Account  with Lancashire County Council unlimited next day
    UK Central Government (irrespective of credit rating) unlimited 50 years
    UK Local Authorities (irrespective of credit rating) £5m each 10 years
    Secured Bond Funds AA rating and WAL not more than 3 yrs £5m each n/a
    Secured Bond Funds AAA rated and WAL not more than 5 yrs £5m each n/a

    Allowable bond funds are defined by credit rating and weighted average life (WAL). Investing in senior secured bonds backed by collateral provides a protection against bail-in. Although the average life of the securities within the fund will be either 3 or 5 years, funds can be redeemed within 2 days of request but in general these should be seen as longer-term investments.

    Regarding the risk of investing with another local authority, only a very few authorities have their own credit rating, but those that do are the same or one notch below the UK Government reflecting the fact that they are quasi-Government institutions. On the whole credit ratings are seen as unnecessary by the sector because the statutory and prudential framework within which the authorities operate is amongst the strongest in the world. In addition, any lender to a local authority has protection, under statute, by way of a first charge on the revenues of that authority. No local authority has ever defaulted to date, and this also may be an indication of security. However, when the UK credit rating by the rating agencies has been downgraded those local authorities with a rating saw a reduction in their ratings. Therefore, consideration has been given to reducing the risk associated with the investment with other local authorities. Arlingclose, the County Council’s Treasury Management advisor, state they are “comfortable with clients making loans to UK local authorities for periods up to two years, subject to this meeting their approved strategy. For periods longer than two years we recommend that additional due diligence is undertaken prior to a loan being made.”  On this basis it is proposed that the investments to local authorities are limited as follows:

    Table 10  Investment Limits with Local Authorities

    Maximum individual investment (£m) Maximum total investment (£m) Maximum period
    Up to 2 years 5 30 2 years
    Over 2 years 5 25 10 years

    The investment in LCC as part of the call account arrangement is excluded from the above limits. The balance on this account is dependent upon short term cash flows and therefore does not have a limit.

    Whilst the investment strategy has been amended to allow greater flexibility with investments any decision as to whether to utilise this facility will be made based on an assessment of risk and reward undertaken jointly between the Director of Corporate Services and LCC Treasury Management Team, and consideration of this forms part of the on-going meetings that take place throughout the year.

    In respect of banks taxpayers will no longer bail-out failed banks instead the required funds will be paid by equity investors and depositors. Local authorities’ deposits will be at risk and consequently although currently available within the policy it is unlikely that long term unsecured term deposits will be used at the present time.

    Currently all of the Authority’s investments are with other local authorities.

    The Authority currently has access to a call (instant access) account with a local authority, which pays bank base rate, this is currently 0.25%. Each working day the balance on the Authority’s current account is invested to ensure that the interest received on surplus balances is maximised.

    In addition, longer term loans have been placed with an UK local authorities to enhance the interest earned. To this end at the following investments are already impacting 2022/23

    Table 11 Current Investments

    Start Date End Date Principal Rate Interest 2022/23
    20/04/20 20/04/22 £5,000,000 1.45 £3,774
    24/04/20 25/04/22 £5,000,000 1.45 £4,767

    Consideration is given to fixing further investments if the maturity fits with estimated cash flows and the rate is considered to be attractive. This will continue to be reviewed. Suggested rates payable by other local authorities are:

    Table 12 Indicative Interest Rates on Investments with other Local Authorities

    3-month investment 0.28-0.34%
    6-month investment 0.34-0.40%
    12-month investment 0.55-0.65%
    3-year investment 0.80-0.96%
    4-year investment 0.90-1.10%

    The overall combined amount of interest earned on Fixed/Call balances as at 31st December 2021 is £0.143m on an average balance of £38.1m at an annualised rate of 0.50%. This compares favourably with the benchmark 7-day LIBID rate which averages a negative yield of 0.07% over the same period, and is 0.25% above the previous bank rate.

    In addition to the above the authority uses NatWest for its operational banking. Balances retained in NatWest are very low, usually less than £5,000. However, if required monies are retained at NatWest this would be in addition to the limits set out above.

    Minimum Revenue Provision (MRP)

    Under Local Authority Accounting arrangements, the Authority is required to set aside a sum of money each year to reduce the overall level of debt. This sum is known as the minimum revenue provision (MRP).

    The Authority will assess their MRP for 2022/23 in accordance with guidance issued by the Secretary of State under section 21(1A) of the Local Government Act 2003.  

    The Authority made a voluntary MRP in 2019/20 and it is anticipated that the MRP on loans will be nil in 2022/23 this will be the case until capital expenditure is financed by borrowing.

    Whilst the Authority has no unsupported borrowing, nor has any plans to take out any unsupported borrowing in 2022/23 it is prudent to approve a policy relating to the MRP that would apply if circumstances changed. As such in accordance with the Local Government Act 2003, the MRP on any future unsupported borrowing will be calculated using the Asset Life Method. This will be based on a straightforward straight – line calculation to set an equal charge to revenue over the estimated life of the asset. Estimated life periods will be determined under delegated powers. To the extent that expenditure is not on the creation of an asset and is of a type that is subject to estimated life periods that are referred to in the guidance, these periods will generally be adopted by the Authority.  However, the Authority reserves the right to determine useful life periods and prudent MRP in exceptional circumstances where the recommendations of the guidance would not be appropriate.

    As some types of capital expenditure incurred by the Authority are not capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure.  Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure and will only be divided up in cases where there are two or more major components with substantially different useful economic lives.

    Assets held under a PFI contracts and finance leases form part of the Balance Sheet. This has increased the overall capital financing requirement and on a 4% basis the potential charge to revenue. To prevent the increase the guidance permits a prudent MRP to equate to the amount charged to revenue under the contract to repay the liability. In terms of the PFI schemes this charge forms part of the payment due to the PFI contractor.

    Revenue Budget

    The capital financing budget currently shows that income received exceeds expenditure. This excludes the PFI and Finance lease payments, which are included in other budgets. Based on the Strategy outlined above then the proposed budget for capital financing are:

    Table 13 Capital Financing Charges Included in Revenue Budget

    2021/22 2022/23 2023/24 2024/25
    £m £m £m £m
    Interest payable 0.090 0.090 0.090 0.090
    MRP 0.010 0.010 0.010 0.010
    Interest receivable (0.194) (0.300) (0.200) (0.100)
    Net budget (0.094) (0.200) (0.100)

    Although the MRP requirement is currently nil the budget includes a provision for making a charge either due to incurring a small amount of borrowing or to make a voluntary MRP to offset against future requirements.

    Prudential Indicators for 2021/22 to 2024/25 in respect of the Combined Fire Authority’s Treasury Management Activities.

    In accordance with its statutory duty and with the requirements of the Prudential Code for Capital Finance and the CIPFA Code for Treasury Management, the Combined Fire Authority produces each year a set of prudential indicators which regulate and control its treasury management activities.

    The following table sets out the debt and investment-related indicators which provide the framework for the Authority’s proposed borrowing and lending activities over the coming three years.  These indicators will also be approved by members as part of the Capital Programme approval process along with other capital expenditure-related indicators but need to be reaffirmed and approved as part of this Treasury Management Strategy.

    It should be noted that contained within the external debt limits, there are allowances for outstanding liabilities in respect of the PFI schemes and leases. However, accounting standards are likely to change in relation to recording leases. In effect more leases are likely to be included on the balance sheet and therefore will be included against the other long term liabilities indicators. At this stage work is on-going to quantify the impact of the change and therefore the other long term liabilities limits may be subject to change.

    Table 14  Treasury Management Prudential Indicators

    2021/22 2022/23 2023/24 2024/25
    £m £m £m £m
    1.    Adoption of the CIPFA Code of Practice on Treasury Management Adopted for all years
    2.    Authorised limit for external debt – A prudent estimate of external debt, which includes sufficient headroom for unusual cash movements.
    Borrowing 6.000 6.000 6.000 10.000
    Other long-term liabilities 30.000 30.000 30.000 30.000
    Total 36.000 36.000 36.000 40.000
    3.    Operational boundary for external debt – A prudent estimate of debt, but no provision for unusual cash movements.  It represents the estimated maximum external debt arising as a consequence of the Authority’s current plans.
    Borrowing 3.000 3.000 3.000 8.000
    Other long-term liabilities 17.000 16.000 15.000 15.000
    Total 20.000 19.000 18.000 23.000
    4.    Upper limit for fixed interest rate exposure
    Upper limit of borrowing at fixed rates 100% 100% 100% 100%
    Upper limit of investments at fixed rates 100% 100% 100% 100%
    5.    Upper limit for variable rate exposure
    Upper limit of borrowing at variable rates 25% 50% 50% 50%
    Upper limit of investments at variable rates 100% 100% 100% 100%
    6.    Upper limit for total principal sums invested for over 364 days (per maturity date) 25.000 25.000 25.000 25.000
    7.    Maturity structure of Debt   Upper Limit % Lower Limit %
    Under 12 months 100
    12 months and within 24 months 50
    24 months and within 5 years 50
    5 years and within 10 years 75
    10 years and above 100