Finance peer challenge: East Hertfordshire District Council

This Finance peer challenge was conducted in two parts in response to immediate support requested by East Hertfordshire district council (EHDC) ahead of their executive budget meeting. The first part was a rapid desktop review of the 2024/25 budget report, which took place in the days between an initial scoping meeting between the chief executive and the LGA principal adviser for the east of England and the executive meeting. The second part was a workshop delivered on-site at EHDC’s offices on Peg Lane in Hertford.

The desktop review contains several recommendations aimed at enhancing transparency, risk analysis, and the supporting information within the council's budget report. The review emphasises the need to incorporate comprehensive risk assessments related to the proposed savings measures. This includes detailing the likelihood and potential impact of not achieving the targeted savings. It also found that the budget report would benefit from clear explanations as to how the savings identified impact on future years and ensuring that all savings figures are fully reconciled.

The report also identified that the useable reserves were comparatively low, and that the council should consider financial risks in determining a minimum level of reserves to be maintained.

It is highlighted in the review that EHDC would benefit from a thorough business case substantiating the revenue projections from the new civil parking enforcement policy, which accounts for a significant portion of the planned savings. Additionally, it recommends publishing an explicit statement on the council's usable reserves position within the budget report itself although it is noted that this is produced for the council meeting.

The review indicates that the council's approach to rescheduling its capital programme seems sensible overall. However, the success of this strategy hinges heavily on achieving sufficient proceeds from planned asset sales worth over £10m, as well as meeting ambitious income targets from capital investments like the £30m Hertford theatre refurbishment, one of the council's largest ongoing capital projects. Given the dependency on the theatre’s commercial viability to meet budgetary needs, the report recommends conducting further in-depth risk analysis specifically evaluating the viability of the income growth assumptions underpinning the Hertford Theatre's business model post-refurbishment. A comprehensive assessment of the potential risks to achieving these income targets is crucial, as a shortfall could significantly impact the council's overall long-term financial outlook.

The review raises concerns regarding the council's financial monitoring process. Specifically, it notes that the quarter two monitoring report was considered by the executive approximately four months after the end of the period. This delay limits the ability to take timely and meaningful corrective actions in response to identified budget variances. The review suggests that the council should aim to provide more substantive and actionable insights in future quarterly monitoring reports, beyond noting forecasted outturns and describing budget variances. Comprehensive and prompt quarterly reports would enable scrutiny and course correction by the executive throughout the financial year, rather than noting variances after the fact.

The desktop review concludes that while the budget approach is considered sensible, a more robust analysis is required to support the findings of the somewhat limited report. The treasury management strategy is viewed as prudent; however, a reassessment of borrowing practices in the short term may be necessary in the future.

The workshop took place on 19 March 2024, conducted by the peer team. The workshop included members and officers at EHDC and covered the importance of the medium-term financial strategy (MTFS), the annual budget setting cycle, and best practice around performance metrics. It is recommended that conversations continue internally around financial monitoring, in particular to specify the performance metrics that the executive would like to see and how regularly, as well as the metrics that individual portfolio holders would find helpful.

Given that EHDC's last corporate peer challenge (CPC) occurred in 2018, it is important to note that it is recommended for all councils to undergo a CPC approximately every five years. Therefore, to ensure ongoing improvement and effectiveness in governance and service delivery, we advise EHDC to consider scheduling a CPC in the near future. 

There are a number of observations and suggestions within the desktop review that were discussed at the workshop. The following are the peer team’s key recommendations to the council:

Recommendation 1

Budget reporting:

• To provide a clear reconciliation of all savings figures quoted in the report.
• Clarification of the impact of savings on future years.
• To produce a risk schedule covering the likelihood and impact of not delivering the savings which is included in the budget report.
• To produce a schedule of delegated savings together with a risk schedule, to be included with the budget report.
• To produce and include a comprehensive business case to support the civil parking enforcement, to be included with the budget report.
• That the rationale for increasing the council tax base by 500 is explained with the options considered and discounted.
• That a statement setting out the useable reserves position is published in the budget report.

Recommendation 2

Financial monitoring:

• That a working group including officers and executive members be established to identify what performance metrics members would like to receive, how regularly, and the purpose of such metrics. 
• To establish clear roles for portfolio holders in the regular monitoring of, and communication around, budget pressures within their portfolio areas.
• That quarterly monitoring is reported to members within two months of the period end and that the portfolio holder is briefed within four weeks of month end.

Recommendation 3

That the capital programme be continually reviewed with a view to ensuring rescheduling reduces the reliance on borrowing.

Recommendation 4

That the full business case for the commercialisation of the Hertford theatre be revisited and presented to members for examination and approval to ensure that the revenue benefits of the project are fully reflected in the budget going forward.

Recommendation 5

To develop and foster an organisation-wide understanding and ownership of the links between the transformation programme, corporate plan, and the budget.

Recommendation 6

That the period up until July is used by members to consider budget options to be included in the MTFS

The peer team

Peer challenges are delivered by experienced elected member and officer peers. The make-up of the peer team reflected the focus of the peer challenge and peers were selected on the basis of their relevant expertise. The peers were:

• Andrew Hardingham, finance improvement & sustainability associate (FISA)
• Cllr Caroline Jackson – deputy leader, Lancaster city and deputy leader, LGA Independent group
• Aimee Wittams-Smith – east of England regional adviser, LGA

Scope and focus

In a meeting on 5 February 2024 between Richard Cassidy, chief executive at EHDC, and Rachel Litherland, LGA principal adviser for the east of England, it was agreed that peer team would provide feedback and support on the 2024-25 budget setting process and financial monitoring. The following scope was agreed:

“EHDC had an ambitious capital programme under the previous administration. Four major capital projects were undertaken: two swimming pools and leisure centres, the Old River Lane redevelopment, and the Hertford theatre refurbishment. The two leisure centres used up a significant proportion of the council's capital reserves. The Old River Lane project is a mixed development including an arts complex, however the budget papers set out the that the arts centre element of the Old River Lane scheme be delayed until the council is in a position to borrow further, reducing the impact of minimum revenue provision (MRP) and borrowing repayments on the revenue budget. Members have decided to increase the budget from £18m to £30m in order to complete Hertford theatre. These projects have significantly impacted reserves, and the council must continue despite the mounting expenses due to the amount of money already committed.

The new administration has inherited this situation and there are limited opportunities for asset sales to raise additional funds. Information delays effect the new administration's ability to monitor performance and there is no monthly dashboard on finances. The council is relying on borrowing and asset sales and an independent external review could help validate if the council is making appropriate decisions regarding capital projects, reserves, and asset management. This would support the new administration in making informed decisions going forward.

The budget for 24/25 looks balanced, but the consequence of the budget means selling assets to reduce borrowing and reduce the debt. Without effective budget monitoring, the council is seeking confidence that the decisions it is making are the most sensible going forward.”

The peer challenge process

Peer challenges are improvement focused; it is important to stress that this was not an inspection. The process is not designed to provide an in-depth or technical assessment of plans and proposals. The peer team used their experience and knowledge of local government to reflect on the information presented to them by people they met, things they saw and material that they read. 

Shortly before EHDC’s Executive meeting to discuss the 2024/25 budget, EHDC approached the Local Government Association (LGA) to provide support. It was agreed on 5 February 2024 that a financial improvement and sustainability adviser (FISA) from the LGA would undertake a desktop review of the reports already published ahead of the executive meeting on 13 February 2024. Following this initial desktop review, a workshop session would be held in March 2024 with the FISA, chief executive, section 151 officer, senior management team, council members, and an LGA member peer. During this workshop, best practices around budget setting processes and financial monitoring would be discussed, allowing for a constructive dialogue on enhancing EHDC' budget management strategies for the upcoming financial year.

The peer team prepared by reviewing a range of documents and information in order to ensure they were familiar with the council and the challenges it is facing. The team then held meetings with the chief executive, section 151 Officer (head of finance and property), leader and portfolio holder for finance (executive member for financial sustainability).

This report provides a summary of the peer team’s findings. In presenting feedback, they have done so as fellow local government officers and members.

Desktop review

The desktop review was completed by Andrew Hardingham (FISA), commissioned by the LGA and was the first part of the LGA finance peer challenge. The review drew on reports issued to the council’s Executive in relation to the 2024/25 budget, including the Budget 2024/25 and Medium Term Financial Plan 2024-2034 report as published ahead of the executive meeting scheduled for 13 February 2024. Andrew Hardingham met with members and the chief executive on 9 February to discuss the review, and the desktop review was issued to the council on 12 February 2024. Due to the work taking place at pace in the days leading up to the committee meeting, exploration of documents beyond those published was limited and therefore the council indicated that clarification was required on some of the points in the review. The peer team have taken into account the comments provided by the section 151 officer following the date spent on site.

Savings

The budget report highlights the need for savings in the coming years, but there are discrepancies between the figures in the main report and appendix C, which need clarification. The narrative around delegated savings and associated risks could benefit from further explanation. One major saving proposal involves revenue from a new civil parking enforcement policy, but it is unclear if the funds will balance the parking account or contribute to future savings targets. The council plans to mitigate these risks by setting reserve prices for auctioned assets, but failure to realise these savings could impact the overall budget.

Council tax base and collection fund

The budget assumes an increase of 500 new properties per year for the council tax base, but members would benefit from seeing different scenarios modelled based on the assumptions and associated risks. There's a reported deficit in the collection fund, and it's important to understand the assumptions made about the collection rate and bad debts, as EHDC's tax collection rate is below the average compared to CIPFA nearest neighbours (LGInform – Council tax collected as a percentage of council tax due in East Hertfordshire) 

Minimum revenue provision (MRP)

The council’s Capital Strategy and Minimum Revenue Provision Policy 2024/25 incorporates the recommendations contained within the MHCLG guidance issued in 2018. 

Pension fund deficit contribution (£0.637m)

The council have prudently retained provision for a deficit payment fixed at the previous triennial valuation figure for the life of the MTFS. Whilst not affecting the 2024/45 budget, there may be scope to reduce this as pension funds are reporting improved positions.

Statement of reserves

LGInform - Total reserves excluding schools and public health as a proportion of net revenue expenditure in East Hertfordshire compares EHDC’s total reserves (excluding schools and public health) as a proportion of net revenue expenditure against the CIPFA nearest neighbours.

The most recent published accounts cover the period up to 2021/22, showing usable reserves of £21.3m as of March 2022. However, after discounting specific reserves, the sum of usable earmarked reserves is £4.7m. The budget report would benefit from updated information on the status of these reserves and the general fund working balance, as well as the impact of the forecasted £0.491m overspend (as of September 2023) for 2023/24.

Capital

The capital monitoring report for 2023/24 forecasts an outturn of £33.95m, which is £4.398m above the revised capital budget. The Hertford theatre project is significantly over budget, and additional borrowing will be required. The council plans to charge MRP over eight years for new waste vehicles and containers, and £24.2m in external borrowing is required for the 2024/25 capital programme.

Treasury management

As of December 2023, the council held £31.522m in borrowing, which is forecast to increase to £55.2m by the end of 2024/25 and £62.8m by the end of 2025/26, due to the need to borrow for the capital programme. The council's borrowing strategy aims to address affordability without compromising the long-term stability of the debt portfolio, and the approach to borrow short-term is considered prudent in the current economic circumstances.

Budget setting and financial monitoring workshop

The workshop held on 19 March 2024 was attended by the chief executive, section 151 officer, senior management team (SMT), and executive members. Andrew Hardingham covered several key objectives around understanding the budget process, timelines, roles and responsibilities, as well as information needs for effective budgeting. The workshop highlighted findings from the desktop review and the importance of having a robust MTFS that provides a clear view of future financial sustainability and informs decision-making.

The four main stages of the budgeting process were outlined as: planning and setting the budget, scrutinising the proposed budget, monitoring throughout the year, and reviewing outcomes against allocated budgets. Executive members indicated that the corporate plan development and the budget development had felt like two very separate processes where it was apparent that they should be more interlinked. Officers highlighted that upcoming work on the transformation programme should help with tying the budget to the corporate plan, and members raised concern that as it was inherited, the transformation programme had not been developed to align with corporate plan and was instead focussed on saving money. Officers assured members that whilst savings needed to be made, resources can still be shifted towards the things that they want to achieve, and that the role of officers is to help them achieve their ambitions in the corporate plan. The car parking strategy was presented as a prominent example where officers are working to achieve their ambition. This insight was valuable for members in gaining a deeper understanding of how their input can influence outcomes, despite evident limitations.

Councillor Caroline Jackson provided insight from a member perspective. She emphasised the need to be ambitious with the corporate plan, make the most of available resources aligned to priorities, value and retain officers as critical resources, and communicate proactively with stakeholders around the budget process. She also highlighted the importance of communicating with residents and partners regarding the budget in the autumn time so that there is a wider understanding of the challenges ahead of the final lead-in to budget approval.

It was discussed and agreed that there could be more clarity on the roles of portfolio holders in tracking and championing the projects within their portfolios. In particular, members were keen to see the actual spending within their portfolio areas, in comparison to what it should look like. It is recommended that officers work with executive members to achieve a more joined up approach.

Andrew Hardingham highlighted some introductory best practice around performance metrics and KPIs for tracking progress against financial goals, which were identified through discussion as areas needing improvement. The role of the audit and governance committee in monitoring the budget was also discussed. The discussion enabled executive members to start thinking about and providing input on the type of financial data and reporting they would find useful, with helpful feedback from the senior management team on what those ideas might look like in reality based on the types of measures they already monitor. Members suggested that new financial systems which are being put in place could be utilised to automate some of the desired performance metrics, as the current system requires manual input which the section 151 officer had highlighted is an obstacle. Members and officers agreed to continue these constructive conversations beyond the workshop, in particular for the members to identify exactly what information it is that they would like the section 151 officer to provide.

Through group discussions, the workshop explored the question of budget ownership, emphasising the shared responsibility across various stakeholders, including the chief executive, section 151 officer, senior management team, executive and full council. 

Finally, next steps were outlined, including a commitment from officers and members to engage in further discussions and actions to strengthen the budgeting process and enhance financial oversight within EHDC.

It is recognised that senior political and managerial leadership will want to consider, discuss and reflect on these findings. 

Both the peer team and LGA are keen to build on the relationships formed through the peer challenge and further support can be discussed.

In the meantime, Rachel Litherland, principal adviser for the east of England, is the main contact between your authority and the Local Government Association. Rachel is available to discuss any further support the council requires. [email protected], 07795076834.