Agenda item

 

Report from the Strategic Director of Finance and Customer Services.

 

Recommendations:

 

1. That Cabinet note the Medium Term Financial Strategy 2025/26 to 2028/29 update.

 

 

At the Chair’s invitation, Councillor Alam, Cabinet Member for Finance & Community Safety introduced the report explaining that the reports was an update on the council’s budget and the medium-term financial strategy to 2028-29. It included the standard technical base required, recognition of financial pressures impacting service delivery, and the ongoing effect of inflation on the council’s base costs.

 

The technical adjustments also included the council’s assessment of the potential impact of the government’s fair funding review, which aimed to make significant changes to the way local authority funding was allocated. The review was expected to introduce major changes to the formulas used for funding distribution, and it appeared that more areas would require additional funding.

 

The medium-term financial strategy was scheduled for further revision ahead of the council’s budget-setting in March 2026 to reflect the local government settlement once issued, along with budget policy proposals on council tax levels, reserves, fees and charges, and any required budget savings.

 

The funding review represented the most significant change in local government funding approaches for many years and introduced a degree of uncertainty. The medium-term review sat alongside financial monitoring, which was presented to Cabinet and projected a financial overspend of £0.9 million.

 

Council tax collection rates remained strong despite cost-of-living challenges faced by residents and businesses. However, due to the impact of Speciality Steel, there was a potential effect on business rates. The Council expected to balance its budget to the outturn position before year-end, although risks remained, and the use of reserves might have been required.

 

Judith Badger, Strategic Director for Finance and Customer Services followed on by explaining to members that this was a point in time based on the Council’s best understanding of the situation, with some significant changes since the budget was set in the Medium-Term Financial Strategy (MTFS) back in March.

 

Members of Scrutiny were due to receive the presentation on the final MTFS near budget time in the usual way, but an update at this point in the year was provided to bring members up to date with how the position was looking. It was a plan based on planning assumptions, estimates, and available information, and the government’s budget at the end of the month was expected to give some indications of new factors to consider and whether they aligned with the Council’s expectations.

 

The Strategic Director for Finance and Customer Services pointed out to members that this reflected only the national policy position and not the Council’s settlement. The actual settlement, knowing how much money the Council would receive from government, was not expected until quite close to Christmas, likely late December. So, this was presented to bring members up to speed, but it was highly likely the position would change again later in the year when the Finance team took Members through the detail before budget setting.

 

The Chair asked Rob Mahon, Assistant Director, Financial Services to run through the key changes concentrating on the children's services aspect. The Assistant Director, Financial Services noted the easiest starting point was the table at 2.15, which set out the main changes to the MTFS at that point in time based on available information and a review of assumptions around inflation, key contracts, pressures, and opportunities.

 

The table at 2.15 began with the MTFS position approved at Cabinet and Council for 2025–26 to 2027–28. At that stage, the Council had a balanced budget for 2026–27 and a pressure of £3.2 million for 2027–28. The MTFS had not been extended as far as 2028–29; however, had it been, it would have shown a pressure of £6.8 million.

 

As part of the MTFS review, assumptions and the budget position were monitored and reported to Cabinet throughout the year. A key challenge for 2028-29 was the impact of previous capital investment decisions, with borrowing costs carried forward. Treasury management savings of £3–4m had been secured for 2025-26 to 2027-28 but were expected to drop out in 2028-29, creating a £4m pressure. Further savings might be possible, but economic conditions were too uncertain to project at this stage.

 

Revised inflation assumptions were also highlighted. The local government pay award for 2025–26 was 3.2%, higher than the 2% anticipated in the budget, creating a £2.3 million impact year-on-year and compounding future pay award assumptions. Inflation assumptions for social care providers, particularly adults and Children and Young People’s Service (CYPS), were increased to provide capacity to meet potential demand.

 

Members were informed that Speciality Steel had ceased to exist, leaving 22 months of unpaid debt covering the last quarter of 2023–24, the whole of 2024–25, and the first six months of 2025–26. The company was taken over by a government-appointed liquidator. While rates for the remainder of the financial year were expected from the liquidator, no payments would be received for the outstanding debt. This would be managed through the business rates collection fund.

 

It was explained that the structure of the national business rates collection fund meant that the Council did not take a single year “big bang” impact when losing a major business ratepayer, such as Speciality Steel. The collection fund allowed the deficit to be managed over time. This meant the Council would carry the deficit in its non-domestic rates (NDR) collection position but could gradually reduce NDR assumptions, as reflected in the relevant line, to account for a reduced level of income from business rates. This approach would bring the position back to balance or surplus over time.

 

The longer-term sustainability of the site remained uncertain, and it was too early to determine whether an equivalent business would occupy the site in the future. At present, the Council was dealing with a historical write-off position. Business rates growth had been low in 2024–25, concluding at the end of that financial year, after budget setting. A review was carried out in early 2025–26, which resulted in softened growth assumptions for business rates. A similar review would take place heading into 2026–27 as part of the budget-setting process. While some growth during 2025–26 might provide an additional benefit, the current position remained challenging.

 

It was noted that there were additional inflation impacts across the board. Inflation remained at 3.8%, which was still higher than the historical Bank of England base rate target of 2% for CPI inflation. This continued to drive up some of the core costs funded through the MTFS.

 

Members were informed of a few simpler adjustments, including the PES Education System pressure. This related to new capital investment approved in the previous year’s budget. As the project progressed, it became clear that there would be a greater level of dual running between the old system and the new system to ensure a smooth transition. This required additional system capacity and some extra resources to deliver the scheme. While not a significant adjustment, it was necessary.

 

CYPS placement pressures were also highlighted, as this had been a key issue raised by members over recent years. The challenge was twofold: a long-standing non-delivery of savings linked to placement pressures and an overspend in the CYPS budget year-on-year. However, it was noted that the budget had been reduced annually, and overall CYPS spend had been coming down. Compared to nearest neighbours, whose costs were increasing, the Council was now reaching a positive position.

 

Work on the MTFS was well advanced, and it was hoped that some of the savings could be reflected in monitoring reports for Cabinet between November and January. It was explained that a significant portion of the savings linked to placements had effectively been delivered. In 2019–20, the Council had 600 looked-after children, compared to 472 at the start of planning for 2025–26, with a rolling target of around 470. If the Council were still funding 600 placements at current prices, costs would be approximately £9.5 million higher. The reduction in looked-after children numbers and the move to more appropriate and affordable placements had significantly improved the CYPS budget position over the past five years.

 

However, the wider challenge remained market forces, with inflation on placement costs driven by both general inflation and high demand in the sector.

 

It was noted that demand had driven prices upward, resulting in significantly higher inflation levels. Benchmarking had been undertaken, and there was potential to set out clearly, either in the next monitoring report or the forthcoming budget report, that inflation for CYPS placements had likely been underestimated in recent years when compared to the wider national market.

 

This would support a case for declaring a substantial portion of savings as appropriately delivered and for uplifting the CYPS placement budget. At that point, the working draft of the MTFS included £2 million, although this was not expected to be the final position. As highlighted by the Strategic Director of Finance and Customer Services, this represented a point in time, and work would continue. It was intended to increase CYPS budgets for 2026–27.

 

The Assistant Director for Financial Services reported that £4.3m was allocated for Home to School transport in the 2025–26 budget after strengthening policies and controls. Costs were contained, but rising demand from the September 2025 intake created minor pressure to be addressed in the MTFS. Delayed SEND reforms limited options to reduce overspend beyond current efficiencies. Some figures remained provisional as the MTFS was in draft, with updates due in January. Potential pressures included increasing complexity in adult care and higher baby pack costs if current investment continued.

 

It was agreed that Local Plan costs would be managed through a dedicated reserve rather than annual allocations, with funds drawn down as activities were confirmed. UKSPF ended at the close of the financial year. Several council-supported activities risked being unfunded in 2026–27, and discussions with South Yorkshire Mayoral Combined Authority (SYMCA) and on the integrated settlement were ongoing to identify future funding options.

 

The Council’s local council tax support top-up scheme had reached the end of its current funding, as it was an annually agreed project. Members noted the need to decide whether to continue the scheme and how to fund it. A key cost pressure from the 2025–26 pay award was the removal of Spinal Column Point 2 from the NJC structure from April 2026. Options were being considered to adjust the staffing structure, likely requiring staff to move to higher grades, with cost impacts under review. The Household Support Fund ended, and government proposed a Crisis Resilience Fund using the same funding pot. The council was engaged in consultation on the scheme, but guidance had not yet been issued.

 

Funding for Extended Producer Responsibility in the MTFS was increased from £4m to £5.8m following greater certainty from government, representing a £1.8m uplift. The Fair Funding Review was highlighted as a major source of uncertainty, proposing significant changes to the local authority funding formula.

 

The Fair Funding Review aimed to redistribute local authority funding to areas of greatest need and deprivation. Under the current formula, the Council expected up to £20m additional funding by 2028–29, tapered over three years to avoid sudden impacts. Pensions revaluation was discussed, with the employer contribution rate currently at 17.3%. Following consultation and challenge, the Pensions Authority proposed a 5.2% reduction, with an 80% likelihood of remaining 120% funded in three years. This outcome was considered positive, reducing costs by approximately £6m annually over the MTFS period.

 

The impact of Consumer Price Index (CPI) was noted as significant, with September CPI being the key metric for inflating council funding and provider cost assumptions. The MTFS reflected a broadly balanced budget for the next two years, with a projected gap in the final year. This was not considered a major concern due to uncertainties around the Fair Funding Review and potential changes over the next three years.

 

The Chair invited members of the Overview and Scrutiny Management Board (OSMB) to raise questions and queries on the points raised.

 

It was noted that CYPS were significantly behind on delivering £4.5m savings for 2025-26, with £2.3m savings built into 2026-27. Councillor Blackham sought clarification on whether the 2026-27 savings were dependent on achieving the 2025-26 target.

 

The Assistant Director, Financial Services noted that the 2025-26 pressure was mainly due to rising placement costs rather than non-delivery of savings. Two CYPS savings areas remained in progress: completion of the in-house residential placements programme and increasing fostering numbers. These were expected to reduce costs in future years. The £2m increase in the MTFS was a holding position, with further adjustments likely to address placement pressures. Some non-delivery of savings was expected to carry into 2026-27, linked to incomplete residential homes. However, the number of looked-after children had significantly reduced, supporting overall savings delivery.

 

It was assumed that these assumptions had been built into the upcoming budget round. Councillor Blackham sought clarification on the likelihood of receiving a reliable budget for 2026-27 from CYPS. In response the Assistant Director, Financial Services explained the draft MTFS incorporated all current information and would form the basis of the Budget and Council Tax Report, creating a more robust position for CYPS for 2026-27. It was noted that the CYPS budget remained vulnerable to high-cost placements, with single cases potentially exceeding £1.7m annually, making future budgets subject to significant volatility.

 

Councillor A Carter sought clarification on whether the short-term financial impact from the closure of Specialty Steel had been reflected in the medium-term position and what effect this might have on council tax increases. It was also noted that the MTFS assumed a 3% annual council tax rise, and clarification was requested on whether this included the 2% adult social care precept or was in addition to it.

 

The Assistant Director, Financial Services indicated the MTFS assumed a 3% annual council tax increase as a planning assumption, with the split between basic council tax and the adult social care precept to be determined during the budget process. The maximum increase without a referendum was noted as 5%. Regarding Specialty Steel, the unpaid bill would result in a business rates write-off, already reflected in MTFS assumptions. This would create a deficit in the Business Rates Collection Fund, requiring gradual adjustment of future assumptions. The future sustainability of the site remained uncertain.

 

In a supplementary question, Councillor A Carter sought clarification that the MTFS assumed no business rates from the Specialty Steel site and asked about the financial impact on council taxpayers. He queried whether discussions had taken place with government to mitigate the impact of the closure of this nationally significant industry on the council and local taxpayers.

 

The Assistant Director, Financial Services said the MTFS accounted for the write-off of debt from Specialty Steel and assumed continued business rate income for the current year while the government remained in occupation. Future sustainability of the site was uncertain, with discussions ongoing. The risk would be carried in the MTFS, as loss of business rates would create additional budget pressure, though not directly linked to council tax increases, which were determined alongside all other pressures and opportunities.

 

Councillor Baggaley asked how confident the Council was that the TBC items listed in the table would not lead to an unbalanced position in future years. The Assistant Director, Financial Services noted that, while the Council had a strong track record of setting balanced budgets, the current position remained uncertain due to the Fair Funding Review. The outcome was expected in late December and could either improve or worsen the funding position. The MTFS process would continue to be closely monitored, with flexibility to adjust assumptions as needed. Work on the TBC items was progressing, but the Fair Funding Review was identified as the greater risk.

 

The Chair asked when the Council would need to start addressing the projected budget gap for 2028-29 and at what point action should be taken. The Strategic Director for Finance and Customer Services noted that the upcoming settlement would provide a clearer three-year position. Future budget gaps would depend on factors such as capital investment decisions, the Fair Funding Review, council tax levels, and other uncertainties. The MTFS currently assumed a 3% annual council tax increase as a planning figure, with the final decision to be made during the budget process. Reserves remained strong and could be used strategically if required, though none were currently allocated for this purpose. Members were advised that figures could change significantly, and options would be considered once the settlement and other variables were confirmed.

 

Councillor Blackham asked whether the Council was a preferential creditor in relation to Specialty Steel. The Assistant Director, Financial Services confirmed there would be no recovery of the debt.

 

Councillor Bacon raised a question about the South Yorkshire Pensions Fund position, asking whether 120% funding was considered reasonable or if a lower level would be preferable. It was noted that the actuary determined the funding level, and the Council had challenged the previous overly prudent position. Following lobbying by South Yorkshire councils, the rate was reduced to 120%, which was considered reasonable, though still cautious. The outcome was viewed positively, as it avoided future increases in employer contributions and delivered significant savings.

 

Councillor A Carter raised a concern about whether the MTFS assumption of future business rates from the Specialty Steel site was overly optimistic and the potential financial implications for the Council if this income did not materialise.

 

The Chair noted that any loss of business rates from the Specialty Steel site would be addressed through the annual budget-setting process. The Assistant Director, Financial Services confirmed the potential impact was £1.3m per year and would be managed within the MTFS if the site ceased to generate business rates, though this would not affect the 2026–27 position.

 

Cabinet Member for Finance & Community Safety noted that the main issue was the Fair Funding Review and advised waiting for the government’s announcement before reviewing figures. He stated that the Council had managed its financial position prudently and would act accordingly once the settlement was confirmed.

 

Resolved: That the Overview and Scrutiny Management Board supported the recommendations:

 

1. That Cabinet note the Medium-Term Financial Strategy 2025/26 to 2028/29 update.