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Council / Difficult decisions ahead as fresh warnings made over SIC’s financial sustainability

SHETLAND Islands Council will need to make some “difficult choices” ahead of setting next year’s budget – with continued warnings about financial sustainability.

These decisions may include reprioritising planned projects and scaling back its asset investment programme.

It comes after a mixed audit report from the Accounts Commission which expressed concern over the council’s future financial outlook, and the pace at which change was being brought about. 

The council is expected to overspend in 2022/23 by around £2.5 million, and now fresh warnings have been made for the years ahead.

In the past, the SIC has always drawn an “unsustainable” amount from its own reserves to balance the books.

A new medium-term financial outlook was presented to members of the full council this week and it contains what are described as “stark” figures.

Three financial planning models have been used to gaze ahead to 2026/27, and the most likely outcome is that – if nothing changes – the council is looking at a cumulative deficit of £106.4 million.

The best case scenario – again, if financial pressures are not addressed – is a cumulative deficit of £50.6 million come 2026/27, and the worst case is £157.9 million.

Outgoing SIC finance manager Jamie Manson. Photo: HIAL

These types of figures are nothing new for councillors, who have long been warned around unsustainable nature of the local authority, which is heavily reliant on core funding from the Scottish Government.

There is also fresh caution around the council’s Our Ambition programme, which was approved in late 2020 and has a focus on delivering services to support the medium to long-term sustainability of Shetland.

The outlook said there will be a “huge challenge on our hands if we are to become financially sustainable while focused on delivering all the priorities identified in Our Ambition”.

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Meanwhile some of the recommendations for ways to potentially reduce spending in 2023/24 include:

Refocusing the council’s core priorities, and pausing or deferring work in non-prioritised areas

Exploring opportunities to automate transactional financial and administrative processes to free up staffing resource currently deployed on those activities

Scaling back the council’s asset investment programme so that capital expenditure is focused on maintenance of existing assets only

Translating the aspirations of Our Ambition into specific, measurable, achievable, time-bound and realistic projects or programmes of work.

For the next financial year, the estimated budgetary deficit of £20.8 million does not account for any growth in services or demand – a figure described as “quite significant”.

The need to take action on the finances was described as “more pressing” as the SIC seeks to proceed with a range of investments in services and infrastructure.

There is also a statutory scheme which determines how much the council can borrow to be deemed “prudent, affordable and sustainable”.

Finance manager Jamie Manson wrote in a report to councillors: “It will be difficult to satisfy those requirements of the prudential code and substantially increase borrowing given the council’s issue of financial sustainability.”

He also wrote in the financial outlook’s summary: “We are not the only council to face significant financial challenges, but we have been in an enviable position to use our reserves to meet the shortfall between the income we receive and what we spend delivering services.

“We have been able to tolerate year-on-year funding reductions and accommodate growth in our cost base, but this has been achieved by using our reserves in an unsustainable way.

“Our failure to address longer term financial sustainability will effectively mean we will not be in a position to borrow to fund investment in new assets, curtailing the aspirations of Our Ambition.

“If we continue to manage our finances in this way, our reserves will ebb away in within a decade. That will leave future councils with very difficult decisions to make.”

He said the SIC has “not made as much progress as we would have liked” from the last medium-term financial final which was presented in January.

Shetland South councillor Allison Duncan said at Wednesday’s meeting that the SIC needs to “face up to making difficult decisions” with its finances – otherwise it may face itself with another Accounts Commission “saga”.

Moraig Lyall, who represents Shetland Central, also suggested councillors need to think closely about which projects in the Our Ambition document should be prioritised.

She said it was becoming “clearer and clearer” the SIC will not be able to do them all.

Meanwhile the council is set to engage more with the public regarding its 2023/24 budget.

This was one recommendation of the mixed audit report delivered to the council earlier this year.

Among the plans is an online budget simulator and a virtual ‘town hall’ style event, although there is potential for in-person events in future years.

A report to elected members said the council has not conducted a large-scale public consultation exercise on the budget for more than five years.

“In 2014, a series of workshops were held in public halls across Shetland, however, attendance was not high, with 77 members of the public participating in total,” it added.

“In 2015, an online-only exercise saw greater levels of participation, with 244 members of the public taking part.”

A report was also presented to councillors this week providing an update on the value of the SIC’s reserves.

Showing the volatile nature of the financial markets at the moment, the value dropped by £35 million in the quarter to the end of June.

But the value has bounced back somewhat by £18 million to a value of £398 million.

Meanwhile finance manager Manson made his final appearance at the full council ahead of his move to Highlands and Islands Airports Ltd.

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