Below briefing from Council Officers on the 2019/20 Council Budget – It has been confirmed that the SNP Government intend to cut Edinburgh’s core funding by 2.4%. This is 5 times the expected level – meaning that Edinburgh is being cut by £8.9m more than predicted. On top of this £1.8m is needed for an unfunded pay rise. The total savings target for this year is now £38m.

Background
The Cabinet Secretary for Finance, Economy and Fair Work presented a one-year Draft Scottish Budget for 2019/20 to the Scottish Parliament on 12 December. In contrast to recent years, the announcement included only headline detail of the Local Government Finance Settlement, with provisional authority-specific figures then provided on 18 December. The draft Settlement will now be subject to five weeks’ consultation, with comments invited on the accuracy of the calculations underpinning the accompanying Finance Circular and, as such, all allocations remain provisional at this stage. In addition, the quantum of funding provided to local government may change as part of the Draft Bill’s Parliamentary consideration, given the likelihood of needing to secure the support of at least one other political party represented within the Scottish Parliament to be passed.

1.2 Receipt of each council’s full funding allocation is dependent upon increasing Council Tax levels by no more than 3% in 2019/20 and continuing adherence to national commitments around maintaining current pupil:teacher ratios and guaranteeing a place for every probationary teacher who requires one under the Teacher Induction Scheme.

1.3 The Settlement reflects baselining of the £170m of additional revenue resources initially provided on a one-off basis as part of the revised Local Government Finance Settlement in February 2018. In addition, it includes:

(i) total additional revenue (£210m) and capital (£25m) investment to support further expansion of early learning and childcare provision;

(ii) combined additional revenue funding of £160m to facilitate expansion of Free Personal and Nursing Care for under 65s, continuing implementation of the Carers’ Act and increased investment in health and social care integration, allowing on-going payment of the Living Wage by all adult care providers. A further £12m has also been provided for expanded school counselling services. Local authorities are required to pass on to Integration Joint Boards and/or relevant services a net increase at least equal to their share of this total of £160m of additional funding;

(iii) an indicative £3.3m of additional revenue resources for valuation authorities to support implementation of the recommendations of the Barclay Review of Non- Domestic Rates; and

(iv) a new £50m Town Centre capital fund to enable local authorities to stimulate and support place-based economic improvements and inclusive growth.

1.4 As newly-introduced funding streams, a number of the above sums remain to be distributed amongst Scotland’s thirty-two authorities. Allocation decisions will be taken forward by the joint Scottish Government/COSLA Settlement and Distribution Group (SDG) and presented to COSLA Leaders for approval in accordance with established practice.

Scotland-wide and Edinburgh-specific Settlement, 2019/20
1.5 The headline provisional Local Government Finance Settlement reflects a year-on-year increase of £173m (1.7%) in revenue and £208m (23.7%) in capital funding. These sums, however, reflect both funding for a number of new or expanded commitments (with corresponding expenditure obligations) and other presentational changes, the net effect of which requires to be taken into account in discerning the underlying impact on the Council’s budget framework. The capital allocation additionally reflects £150m of realigned funding, having previously been subtracted from the 2016/17 Settlement in view of wider Scottish Government priorities at that time.

1.6 Receipt of supporting information to the Settlement is on-going but, on the basis of details received to date, it is estimated that, once account is taken of the factors noted above, underlying Scotland-wide revenue funding has decreased by about £230m (2.3%). The specific impact on individual authorities’ financial planning will however depend, in particular, upon the level of funding already assumed to be provided to integration authorities. Edinburgh’s level of grant funding reduction, at 2.4%, is slightly higher than this average, reflecting the net effect of:

(i) an increase of about £2.8m in its share of the needs-based distribution formulae, primarily those calculated with reference to overall population numbers;

(ii) receipt of a £1.7m contribution under the policy whereby no authority receives less than 85% of the average Scotland-wide per capita level of revenue funding;

(iii) offset by a £5.3m reduced contribution from the stability funding floor. Due to a significant reduction in support for historic borrowing costs in recent years, however, the Council will still receive £13.3m through this source in 2019/20.

Implications of provisional 2019/20 Settlement for Council’s budget framework
1.7 At this stage, it is estimated that the provisional settlement as set out above will result in an increase of £8.9m in the Council’s incremental savings requirement for 2019/20. This represents the net effect of a £17.9m like-for-like reduction in grant, less (i) the framework’s pre-existing assumption of the provision of £6.0m of additional demographic-related investment for health and social care services and (ii) the further current assumption of a 0.4% (£3.0m) reduction in revenue grant.

1.8 As noted above, the draft Budget Bill now enters a process of further Parliamentary consideration. This consideration has, in the last two years, resulted in the provision of significant additional resources for Local Government, with £12.4m of further funding provided to the Council in 2018/19. While, due to the tightness of the wider Scottish Government budgetary position, there is no similar guarantee for 2019/20, there is nonetheless the potential for the level of funding to change and members will be kept apprised of any updates as the Bill progresses.

Pay award, 2018/19
1.9 Members may be aware of the decision reached at a Special COSLA Leaders’ Meeting on Friday 14 December to increase by a further 0.5% (to 3.5%) the employer’s pay award for most non-teaching staff for 2018/19. At this stage, in the absence of any indication of corresponding external funding, it is proposed that a provision of £1.8m be incorporated within the framework in respect of this additional liability. Assuming settlement at this level, this will also hasten a similar additional liability in the current year, re-emphasising the need for urgent corrective action, such that a balanced overall position can be achieved by the year-end.

Demographic provision
1.10 As indicated in the budget framework update report considered by the Finance and Resources Committee on 27 September 2018, the level of incremental demographic provision in respect of rising pupil numbers has been reviewed following the publication of updated pupil roll projections in December 2018. Based on these updated projections and in accordance with the established practice of funding at 70% of unit costs to reflect the marginal costs of delivery and incentivise innovative ways of addressing increased demand, a further £0.3m has been included in the framework for 2019/20. No changes to existing levels of provision are proposed for future years at this time.

Updated revenue position, 2019/20
1.11 Taking into account the above changes, the revised savings requirement for 2019/20 has increased by £11m as shown below:

	£m
Incremental savings requirement per report to Finance and Resources Committee on 27 September 2018	27.8
Provisional impact of Scottish Government Draft Budget, based on underlying change in funding once account taken of (i) monies provided in respect of new or expanded commitments and (ii) existing H&SC demographic provision	8.9
Potential recurring implications of improved 3.5% pay offer for non-teaching staff in 2018/19	1.8
Additional demographic provision – Communities and Families (based on updated pupil projections)	0.3
Revised savings requirement	38.8

Further risks

Teachers’ pensions
1.12 Following a review of discount rate assumptions by the UK Treasury earlier in the year, a 5.2% increase in the employer’s superannuation contribution rate will be introduced with effect from April 2019. While the UK Government has confirmed that an element (estimated at around a third) of the additional costs will result in Barnett Consequentials for the devolved Administrations, the Scottish Government is not bound to allocate these sums in accordance with the changes that triggered them. On that basis, and acknowledging the UK Treasury’s earlier indication that the remaining costs would fall to be met by the devolved Administrations, there is potential exposure in 2019/20 and future years to an unfunded liability of up to £7.2m. The Head of Finance will continue to monitor the situation and, working with COSLA colleagues, impress upon the Scottish and UK Governments the importance of fully funding these increases.

Service pressures
1.13 Executive Directors and the Chief Officer of the Edinburgh Health and Social Care Partnership have identified a number of recurring pressures as part of both the current year’s revenue monitoring and future service planning. At this stage, it is expected that all such pressures will be contained within the services affected but there is a risk that these measures will not fully mitigate the sums concerned, adding further to the incremental savings requirement in 2019/20. Updates will be provided to members as the budget process progresses.

Capital funding settlement
1.14 As noted above, the headline level of capital grant funding across Scotland has increased by £208m over the amount received in 2018/19. This increase includes, however, ringfenced sums of £25m to support further expansion of early learning and childcare provision and £50m for the creation of a Town Centre Fund. In addition, the 2019/20 Settlement reflects, as expected, the £150m of General Capital Grant (GCG) previously reprofiled from 2016/17. As with the revenue settlement, the underlying position is therefore one of a slight reduction in core grant funding.

1.15 Transfer of Management Development Funding (TMDF) of £33.877m to support the provision of additional affordable housing accounts for the majority of distributed ringfenced grant. Edinburgh’s 2019/20 allocation of £14.5m for early learning and childcare expansion had previously been confirmed in May 2018. Distribution of the Town Centre Fund capital monies amongst authorities will be determined by the SDG.

1.16 Once account is taken of the core level of grant funding and Edinburgh’s share of the re-profiled monies, the provisional Settlement for 2019/20 includes around £10.4m of additional General Capital Grant funding that will be available for allocation through the budget development process.

Next steps
1.17 Updates concerning the impact of the provisional Local Government Finance Settlement and other pertinent changes on both the revenue and capital budget frameworks will be considered by the Finance and Resources Committee on 1 February and referred to Council as part of the budget-setting process. In the interim, further updates will be provided to members as the budget process progresses.