Agenda item

To consider further the minute of the meeting of 21^st January which, at the request of Councillor Crozier, was taken back to the Committee for further consideration.(Copy of minute and additional report of the Director of Finance and Resources herewith.)

            The Committee considered further the minute of the meeting of 21st January which, at the request of Councillor Crozier, had been taken back to the Committee for further consideration.  An extract of the minute in this regard, together with a further report providing an update on the Revenue Estimates, is set out hereunder:

 

“Financial Estimates and District Rate 2011/12

 

      The Committee was reminded that, at its meeting on 7th January, it had agreed the cash limits for each of the Committees as follows:

 

Committee	£
Strategic Policy and Resources	31,567,500
Health and Environmental Services	40,627,499
Parks and Leisure	22,940,266
Development	19,783,734

 

      The Director of Finance and Resources reported that, since that meeting, each of the Committees had considered and agreed its Revenue Estimates in line with the aforementioned cash limits.  Based on the Estimated Penny Product of £4,893,170, which had been provided by Land and Property Services, that meant that the District Rate increase would be 2.5% for 2011/12 and would result in a Domestic Rate of 0.3002 pence and a Non-Domestic Rate of 26.2248 pence.  The summary of the key elements of the Council’s finances for the next financial year, as agreed by the Committee, would be as follows:

 

	2011/12 Increase/ Decrease	% Rate Increase
Department Estimates	1,478,413	1.14
Current Capital Programme	528,895	0.40
Additional Capital Schemes	3,200,000	2.48
City Investment Strategy	0	0.00
Waste Plan	1,300,000	0.99
City Priorities	1,000,000	0.77
General Exchequer Grant	(214,000)	0.16
Movement in Reserves	-4,500,000	-3.46
District Rate Increase		2.50
Average Impact on Rate Payer		£8.39

 

      Accordingly, it was

 

      Resolved – That the Council be recommended to approve the expenditure contained within the Departmental Estimates and, further to this, that the following District Rate be fixed to meet the estimated expenditure of the several Committees of the Council for the financial year commencing 1st April, 2011:

 

      Non-Domestic Rate - 26.2248 pence

 

      Domestic Rate - 0.3002 pence

 

      The Committee approved also the key messages associated with the rates increase, subject to a number of amendments which had been suggested by the Members.”

 

“1.   Relevant Background Information

 

1.1It was agreed at the Council meeting on 1 February that the revenue estimates for 2011/12 would be taken back for further consideration at Strategic Policy and Resources Committee on 4 February. This is due to the late notification by Land and Property Services (LPS) of a significant change to the estimated rates income. This report provides background on the change in estimated rates income and sets out the options for the way forward. The rates must be set by 14 February and a special Council meeting will held on Wednesday 9 February for this purpose. At the request of councillors, LPS have also been asked to attend the SP&R meeting on 4 February to respond to Members concerns. Separate information will be made available for councillors to aid their discussions with LPS at the meeting.

 

1.2As Members are aware, approximately 74% of the total funding for the Council’s activities comes from the district rate.  Information on rates income is provided by Land and Property Service (LPS) who maintain the valuation list for the city and collect the rate.

 

1.3Each year, the LPS will issue to local councils an estimate of how much it expects to raise from the total rate collected from their area for the coming year.  This is known as the estimated penny product (EPP).  On a quarterly basis during the year, updates are then provided by LPS of the actual penny product (APP) (the amount of money actually estimated to be collected) and finalisation occurs in September, following the financial year end.  If the amount collected at finalisation exceeds the estimate the Council gets a payback, if it is less than the estimate the Councils pay the balance back to LPS.

 

1.4Members will be aware of previous difficulties with the LPS forecasts of rates income, most notably an underestimate of £4.1m relating to 2007/08 resulting in this amount having to be being repaid to Government from BCC reserves. This led to a significant period of BCC working in partnership with LPS including developing a Memorandum of Understanding, assigning BCC staff to review vacant properties and increased liaison with LPS officials. Extra in year forecasts are now produced and finalisations have been reasonable compared to original forecasts.

 

2.   Position in 2010/11 – Current Financial Year Update on Actual Penny Product

 

2.1Members were advised at SP&R in November 2010 of an expected £600k reduction in our APP anticipated rates income for 2010/11(letter from LPS of 27 October). We were also advised by LPS on 3 December that the EPP for the coming year 2011/12 was effectively flat, with no growth. These notifications were factored into our in year position and rates setting process respectively.

 

2.2Due to concerns about the figures provided and the effect of the recession on the rate base, a full report on LPS/Rates issues was discussed at SP&R on 10 December and a letter was issued to LPS on 10 December by the Chair of SP&R (Appendix 1) and the issues discussed with Minister Wilson on 20 December. This was followed up by a letter to Minister Wilson on 23 December. LPS was also invited to attend the SP&R on 18 February 2011.

 

2.3Responses were received from John Wilkinson, Chief Executive of LPS on 23 December (Appendix 2) and Minister Wilson on 14 January, both emphasising the positive nature of the partnership and the active engagement with BCC.  However no indication was given by LPS of any amendment to the previous figures provided for the EPP and the anticipated APP.

 

3.   Most Recent Update

 

3.1Unfortunately, we have been advised by LPS on 26 January that the latest figure for the anticipated APP for 2010/11 is an estimated clawback of some £3.5m, an increase of £2.9m from that advised in late October. This also led to officers having serious concerns about the validity of the 2011/12 EPP figure provided by LPS on which the rates setting assumptions are based. There has been extensive engagement with LPS in the last couple of days to analyse and understand this position.

 

3.2There are 3 key reasons for the changes which impact on both years:

 

(a)     There has been a reduction in the valuation list for non-domestic properties (for example, due to the removal of a number of demolished properties etc) which leads to a reduction in the level of rates billed;

 

(b)    There has been an increase in the level of write off of irrecoverable debt, particularly that associated with bankruptcies and liquidations; and

 

(c)     The number of vacant non domestic properties which are excluded from paying rates has significantly increased (for instance, because the property is deemed to be non occupiable etc)

 

4.   Impact of the Current Position – 2010/11 – APP Clawback

 

4.1We are currently finalising the 2010/11 forecast financial position. Members will recall that we had reported a forecasted underspend of some £2m in November for 2010/11. You are also aware that some £500k of monies set aside for VR in 2010/11 is no longer required. Given this prudent financial planning, we would expect that these monies and some recently notified underspends will be able to address the additional £2.9m of clawback in 2010/11 not factored into our previous forecast, without recourse to reserves.

 

4.2However, there will be limited, if any investment in reserves (opening reserves for 2010/11 are some £9.1m) and effectively the council will have had to absorb an unexpected £3.5m hit to its finances in 2010/11.

 

4.3Members should note that council officers met with LPS officials again on 1 February to explore potential actions which may reduce the clawback position for 2010/11. It is estimated that an additional £0.5m could be raised through expediting the processing of a number of rates assessments where the bills have not yet been issued and other measures. This action is helpful and may ultimately lead to a reduction in the estimated clawback to £3m when it is finalised in September, although equally there are many other factors that could also impact on this final position. However, based on discussions, it is unlikely to improve the current estimated EPP for 2011/12.

 

5.   Impact of the Current Position – 2011/12

 

5.1Due to the significant estimated clawback on the APP for 2010/11, officers met with LPS to seek a detailed reassessment of the EPP on which the current estimates for 2011/12 are based.  In a series of meetings the planning assumptions of LPS were reviewed with the result that the EPP figure has been revised from 0% (on which the present estimates are based) to -2% (minus 2 per cent).  This

 

forecasting process is complex particularly in the recession, but based on current information an EPP of minus 2 per cent is the best information available. This represents some £2.5m of reduced income compared to the figures used in the rate setting process.

     

5.2This means that if the Council wishes to achieve the same outcomes and level of capital investment included in the previous estimates discussed by Strategic Policy and Resources Committee, it would have to increase the level of the rate by 2% to 4.5%.

 

5.3The Table summarises the key elements of the council’s finances for 2011/12 based on the 2.5% district rate increase as previously discussed with Committee. This does not take account of the revised EPP of minus 2%.

 

District Rate and Estimates 2011/12

 

	2011/12 Increase/(Decrease)	% Rate Increase
Department Estimates	1,478,413	1.14
Current Capital Programme	528895	0.40
Additional Capital Schemes	3,200,000	2.48
City Investment Strategy	0	0.00
Waste Plan	1,300,000	0.99
City Priorities	1,000,000	0.77
General Exchequer Grant	(214,000)	0.16
Movement in Reserves	-4,500,000l	-3.46
District Rate Increase		2.50
Average impact on ratepayer		£8.39

 

6.   Options for Rates Setting

 

6.1As Members are aware, departmental estimates have increased by some 1.3% in 2011/12 compared to 2010/11. Whilst potential underspends against these departmental estimates are possible during 2011/12, it is advised that further cuts to departmental estimates would represent a significant risk at this time, given that efficiency savings of £2.9m have already been included and that there has been a real terms cut of over 2%. It is therefore suggested that if Members agree that expenditure commitments must be reconsidered, then the most appropriate options relate to the £1m set aside for investment in local area initiatives and the £3.2m set aside to finance £20.5m of capital expenditure. The options proposed are set out below.

 

6.2(1) Sit at 2.5%. There would be no protection against the likely £2.5m rates clawback. This would mean that planned investments would have to be reduced. The £1m revenue for local initiatives would have to be on a non recurrent pilot basis in 2011/12 and could not be sustained into 2012/13. The non recurrent funding could be found for one year only, given that not all programmes planned for within the rates setting process will start on 1 April meaning that funds can temporarily be redirected to finance local initiatives. Capital investment would have to be reduced to £11m from the current planned £20.5m. We would be most likely in the middle of Council positions, below current inflation and in line with the assumed regional rate increase.

 

6.3(2) Revise the rate increase to 3.5%. BCC would have protected itself against some £1.25m of rates clawback by increasing the rates to 3.5%. In addition, the £1m revenue for local initiatives would be on a non recurrent pilot basis in 2011/12 and could not be sustained into 2012/13. Capital investment would be held at the current planned £20.5m. We would be most likely in the upper third of Council uplifts, below current inflation but above the assumed regional rate increase.

 

6.4(3) Revise the rate increase to 3.5%. BCC would have protected itself against some £1.25m of rates clawback by increasing the rates to 3.5%. In addition, the investment in local initiatives would be £0.5m sustainable for the future and £0.5m on a non recurrent pilot basis in 2011/12 which could not be sustained into 2012/13. Capital investment would be reduced to £15m from the current planned £20.5m. We would be most likely in the upper third of Council uplifts, below current inflation but above the assumed regional rate increase.

 

6.5(4) Revise the rate increase to 4.5%. BCC could achieve the same level of investments in 2011/12 and would have protected itself against some £2.5m of rates clawback in 2011/12 (our current best assessment). We would be most likely in the top 4 councils uplifts and above inflation and the regional rate increase.

 

6.6These options, and their implications, are set out in the table below.

 

Scenario	Average cost to domestic ratepayer per year	Additional Revenue Investment	Additional Capital Finance	Additional Capital Investment	Position of Councils
2.5%	£8.40	£0m sustainable   £1m non recurrent pilot in 2011/12 only	£1.7m	£11m	Middle
3.5%	£11.85	£0m sustainable   £1m non recurrent pilot in 2011/12 only	£3.2m	£20.5m	Top 1/3
3.5%	£11.85	£0.5m sustainable   £0.5m non recurrent pilot in 2011/12 only	£2.5m	£15m	Top 1/3
4.5%	£15.20	£1m sustainable	£3.2m	£20.5m	Top 4

 

6.7The table below, for notation purposes, shows the domestic and non-domestic rate for the above scenarios. The Council will ultimately need to confirm the relevant rates for the relevant scenario, when it is agreed.

 

Scenario	Domestic Rate	Non-Domestic Rate
2.5%	0.3002p	26.2249p
3.5%	0.3032p	26.4811p
4.5%	0.3061p	26.7332p

 

6.8Members will wish to consider the implications of each scenario in terms of the additional costs per annum for Belfast ratepayers and the additional investment that each scenario can deliver.

 

7.         Action regarding validity of LPS information

 

7.1       This whole episode raises serious concerns about the quality of the information provided by LPS. Whilst it is acknowledged that the recession presents many challenges for forecasting and that Belfast has, we understand, been disproportionately hit in terms of bad debts, nonetheless the APP figures provided present a significant reduction in one quarter from previous forecasts of 2010/11, with knock on implications for the EPP in for 2011/12.

 

7.2We therefore asked the Institute of Revenues Rating and Valuation (IRRV) who are UK experts in rating issues to review the information provided by LPS and the significant change since the end of October. Their report is attached at Appendix 3. They have not had a chance to consider all the underlying data on which the estimates are based but they have made the following observations:

 

·         The estimated EPP is not really an estimate – it is simply a figure based on the values in the valuation list at a point in time and takes only limited account of potential changes to the tax base for the forthcoming year;

 

·         The process takes little account of possible reductions in rateable value due to the appeals process – this has resulted in a number of large reductions in 2010/11, many of which are retrospective;

 

·         More regard needs to be taken by LPS about the impact of forecasts on local councils and more regular information should be shared with councils;

 

·         The electronic estimating model should be scrutinised to ensure that it is fit for purpose and there should be an improved notification process between LPS and councils in regard to planned losses;

 

·         It is argued that both the reducing tax base and the increase in write offs should have been better forecast by LPS, in terms of the original EPP for both 2010/11 and 2011/12.

 

·         In future weeks, more information should be obtained from LPS on the potential for additional income from new assessments; details on write offs; costs of collection and the individual elements of the revised EPP. An independent audit of the EPP methodology in the near future is also suggested.

 

7.3We would therefore recommend the need to commission an independent assessment of the current difficulties and the identification of recommendations to improve future forecasting. We would also wish to raise the concerns with the Minister of the Department of Finance & Personnel.

 

Resource Implications

 

      Resources of £3.5m will need to be set aside in 2010/11 for the estimated clawback compared to the original EPP. Income is expected to reduce by some £2.5m in 2011/12 compared to previous estimates.

 

Recommendations

 

      It is recommended that Members note the above report and agree:

 

(a)     which option to take forward to council for the striking of the district rate;

 

(b)    that officers will provide further information and recommended actions for improvements in the forecasting and monitoring by LPS at the meeting on 18 February;

 

(c)     that an independent assessment should be commissioned to understand more fully the current significant revisions to previous estimates and to recommend improvements to future forecasting by LPS; and

 

(d)    that Members concerns should be raised with the LPS when they attend the SP&R meeting and with the Minister of the Department of Finance & Personnel.”

 

            The Director of Finance and Resources outlined the background to the late notification by Land and Property Services of the estimated rates income and provided an update on the Actual Penny Product for 2010/11.  She reviewed the impact which the clawback would have on the Council’s finances in both the current and the next financial years.  The Director then outlined the suggested options for the Committee in relation to the setting of the rate and highlighted the implications which each of the options would have.

 

            She reported that Messrs. J. Wilkinson, I. Greenway and A. Bronte, Land and Property Services, were in attendance to explain the late notification and they were admitted to the meeting and welcomed by the Chairman.

 

            The Members of the Committee expressed their concern about the late changes in the estimated rates income and questioned the representatives of Land and Property Services on the timeliness of the Actual Penny Product notification, its accuracy in relation to the gross rate income, the increase in debt write-off/irrecoverables, the non-domestic vacant rating and exclusions and the accuracy and processes associated with the Estimated Penny Product.

 

            The deputation then made the following points:

 

·         Mr. Wilkinson apologised to the Members of the Committee for the late timing of the notification of the reduction in the estimated rates income and the effect which it had had on the Council in setting the District Rate;

 

·         He outlined the processes involved in forecasting the Penny Product and the main reasons for the large discrepancy, which included an increase in the amount of debt written-off, an increase in the number of vacant properties and the movement from vacant to excluded properties;

 

·         During the period between September till December, there appeared to be a severe deterioration in the rates income and Mr. Wilkinson accepted that that information should have been picked up at an earlier stage and the Council advised sooner;

 

·         Mr. Wilkinson indicated that he had become aware of the situation in mid-January but had not notified the Council, by telephone, until 26th January.  That delay in notification had been due to the processes which required the revised figures to be cleared with the Minister of Finance and Personnel before Councils were advised;

 

·         He accepted that the Council had been working closely with Land and Property Services over the previous number of years but that communications by Land and Property Services could have been better over the previous few months, with the Council being notified sooner by the Agency of the potential decrease in the estimated rates income;

 

·         Detailed discussions had taken place over the clawback amount for 2010/11 and the estimated penny product for 2011/2012 and Mr. Wilkinson stated that he was confident in the robustness of the revised figures;

 

·         Regarding a value-for-money service to the Council, Mr. Wilkinson accepted that that had not been the case over the previous few weeks but asked that the Members take into consideration the overall position and the service which had been provided over the last three years.  The Agency was established to be 50% cheaper in terms of costs of collection compared to English local authorities but Land and Property Services would learn from the recent problems and seek to further improve its service to the Council;

 

·         Mr. Wilkinson indicated that there were some questions about the skills of the team undertaking the forecasting, including an economist, and he would be looking to identify any weaknesses and strengthen those – an additional accountant had already been added to the team;

 

·         Mr. Greenway referred to the work which had been undertaken by the Council’s Building Control Service, which was highly appreciated by Land and Property Services, and reviewed the number of vacant properties which had still to be issued with bills and the reasons for the delays, some 240 bills had yet to be progressed and would be actioned;

 

·         With regard to debt written-off, the Agency was seeking to improve its system for collection, in conjunction with District Councils, and again Mr. Wilkinson accepted that communications with the Council could have been improved over that issue;

 

·         In relation to the report by the Institute of Revenue, Rating and Valuation on a review of the revised Penny Rate Product during 2010/11, Mr. Wilkinson indicated that Land and Property Services would be keen to work with that organisation although it had issues with some of its recent findings;

 

·         The large increase in losses by non-domestic vacant rating exclusions had been as a result of some large companies going into liquidation late in the year, however, other causes for the increase should have been picked up sooner;

 

·         Mr. Wilkinson apologised for the reference in the letter of 23rd December in this regard and recognised that the figure of £262,000 quoted was not in line with the £8 million of non-domestic vacant rate exclusions; and

 

·         Land and Property Services would be seeking to benchmark with other Local Authorities in future.

 

            The Chairman, on behalf of the Committee, thanked the representatives of Land and Property Services for attending and they retired from the meeting.

 

            The Director of Finance and Resources outlined the next step in the rates setting process which included briefings for those Party Groups who had so requested.  In addition, the Party Group Leaders would be meeting with the Minister of Finance and Personnel, Sammy Wilson, MLA, on Tuesday 8th February.  That would be followed by a meeting of the Budget and Transformation Panel later that day in order to ascertain whether or not the Members could agree a position prior to the special meeting of the Council, which had been arranged for Wednesday, 9th February to consider the Financial Estimates and District Rate for 2011/12.

 

            After discussion, the Committee noted the information which had been provided and that the question of the striking of the District Rate would be considered at the special meeting of the Council.

 

            The Committee agreed that it should recommend to the Minister of Finance and Personnel that an independent assessment be commissioned to understand more fully the current significant revisions to previous estimates and to recommend improvement to future forecasting by Land and Property Services.