Managing the Financial Risks
With budgeted expenditure of over £70m and
income targets of over £51m, just for the General Fund alone, it is
fundamental to the financial standing of the Council that its
budgets are realistic, affordable and meet its service
requirements.
A number of different techniques have been
employed to ensure that this Medium Term Financial Plan represents
a needs-based budget that is robust and able to be sustained over
the medium term. Each of these are discussed in turn
below:
Longer Planning Timeframes
With the advent of three-year financial
settlements it is at last possible to draw together the impact of
known future settlements and anticipated future budget
pressures. This means that the Medium Term Financial Plan can
be modelled so as to make clear the level of savings needed for a
safe and sustainable budget requirement, after having met the
commitment of low Council Tax increases.
With such a long planning timeframe there is
sufficient time to assess the implications and put into place
appropriate measures in order to deal with anticipated pressures,
thereby reducing the risk that future years’ aspirations will not
be deliverable.
Due to the delay in announcing the latest
spending review (from 2006 to 2007) the details of the three-year
settlement for 2008/09 to 2010/11 were only notified in December
2007, giving little time to develop detailed plans to minimise the
impact on the budget for the medium term. However, with the
provisional grants for the last two years now known, this will mean
that work can begin in earnest to develop options for delivering a
balanced budget for the remainder of the medium term.
The Planning Cycle - Develop, Review and
Revise
The Budget and this Medium Term Financial Plan set out the
expected levels of expenditure and income for the future. The
estimates are arrived at through careful consideration of historic
trends and actual expenditure levels and any factors which may have
an impact in the future, such as known changes in
legislation. It also requires a degree of estimation and
assumption, such as to calculate the impact of a perceived increase
or decrease in future demand as a result of demographic changes or
patterns of behaviour that have a socio-economic impact.
As time progresses the accuracy of the assumptions behind these
figures will become clearer and in many cases will require the
budgets within this MTFP to change if they are to continue to
reflect the financial implications of delivering the Council’s aims
and aspirations as set out in the Corporate Plan and other plans
and strategies.
Through the financial year the Council regularly monitors its
financial performance against its budgets and will revise them
where necessary, subject to remaining within the overall available
funding envelope. By monitoring the actual expenditure
against budget in this way, means that the budgets can be amended
to best meet the actual needs of the Council, and provide a more
suitable starting point for the next Medium Term Financial
Plan.
Financial Risk Assessment
Even with the most sophisticated approaches to
budget modelling there is always the chance that events happen
which could not be foreseen and plans need to be revisited.
The Council holds reserves as a contingency to meet unanticipated
expenditure that arises from such an unexpected change in
circumstances. In order to be able to gauge the appropriate
level of reserves a detailed financial risk assessment is carried
out and presented as part of the annual Budget Report. All of
the main risks that face the Council are considered, to assess the
likelihood of the risk happening and the possible financial
implications. The most significant of these are listed in the
table overleaf.
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Risk
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Outcome if Risk Occurs
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Mitigating Action
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Bankruptcy of a major supplier or
customer.
Possible risk £250k - £500k
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This could result in having to pay twice for
the same service if payments were made in advance, or see
artificially inflated prices being charged if a replacement service
needs to be obtained at very short notice.
One of the main customer risks is at the Port,
which as the second largest municipal port in the country would
suffer significantly in the event of a birth failure, or a problem
with a regular operator.
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The financial position of new contractors is
vetted prior to entering into any large contracts. Managers are
aware that they have a duty to work closely with key suppliers as
part of contract management role, which would increase their chance
of noticing any problems.
The options around the future operation
arrangements for the Port are currently being reviewed, this will
include consideration of measures to mitigate risks associated with
service delivery failures or operator difficulties.
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Repayment of Grant due to failure to meet
qualifying criteria.
Possible risk £100k - £500k.
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Grant may need to be repaid after the
expenditure has already been committed. There may be no
budgetary provision for the repayment.
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Managers of grant funded schemes are aware of
the need to comply with the terms of the grant. Problems have been
experienced in the past where there has been a change of management
and insufficient hand over. A new grant application protocol
is being developed which will attempt to address this.
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Insufficient budget exists to fully implement
the new concessionary bus scheme.
Possible risk £100k - £300k.
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The budget may overspend if the charges levied
by the bus companies is greater than the budget that is able to be
provided due to insufficient government grant.
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Kent Treasurers have lobbied Government to
provide funding for this as specific grant, to make any funding
shortfall more transparent.
This position will be clearer once the outcome
of appeals by the bus companies is resolved.
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Insufficient budget is available for the
revised pension contribution rates.
Possible risk £0k - £400k.
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The costs arising from the new pension scheme
rates may be more than expected due to changes in the legislation
and the latest actuarial valuation, creating a budget
pressure.
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The budget provision will be tested early in
the new financial year and any shortfall be addressed as soon as it
is realised through identifying funding within the revenue budget
if available. The general reserve may need to be called upon if
that is not possible.
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The Council may incur additional expenditure
as a result of incorrect treatment of VAT.
Possible risk £100k - £250k.
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Incorrect accounting for VAT could affect the
Council’s partial exemption status, causing a reduction in the
amount of VAT that could be reclaimed.
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The Financial Services Section regularly
reminds managers of the need to consult them on areas which
represent the greatest risk, and will seek specialist advice where
necessary.
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