Agenda Document Pack - Moray Council - 26/02/2025
Moray Council · 26 February 2025
Back to Moray Council — 26 February 2025 and its agenda
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Moray Council Wednesday, 26 February 2025 NOTICE IS HEREBY GIVEN that a Special Meeting of the Moray Council is to be held at Council Chambers, Council Office, High Street, Elgin, IV30 1BX on Wednesday, 26 February 2025 at 09:30. BUSINESS 1. Sederunt 2. Declaration of Group Decisions and Members Interests * 3. 2025-26 Budget and 2025-28 Financial Plan Report by Depute Chief Executive (Economy, Environment and Finance) 5 - 26 4. Housing Revenue Account Annual Budget 2025-26 Report by Depute Chief Executive (Economy, Environment and Finance) 27 - 44 5. Treasury Management Prudential Indicators Report by Depute Chief Executive (Economy, Environment and Finance) 45 - 78 Page 1
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Watching the Meeting You can watch the webcast live by going to: http://www.moray.gov.uk/moray_standard/page_43661.html Webcasts are available to view for 1 year following the meeting. You can also attend the meeting in person, if you wish to do so, please come to the High Street entrance door and a member of staff will be let into the building. Page 2
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GUIDANCE NOTES * Declaration of Group Decisions and Members Interests - The Chair of the meeting shall seek declarations from any individual or political group at the beginning of a meeting whether any prior decision has been reached on how the individual or members of the group will vote on any item(s) of business on the Agenda, and if so on which item(s). A prior decision shall be one that the individual or the group deems to be mandatory on the individual or the group members such that the individual or the group members will be subject to sanctions should they not vote in accordance with the prior decision. Any such prior decisions will be recorded in the Minute of the meeting. Page 3
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MORAY COUNCIL Moray Council SEDERUNT Councillor Kathleen Robertson (Chair) Councillor Donald Gatt (Depute Chair) Councillor James Allan (Member) Councillor Peter Bloomfield (Member) Councillor Neil Cameron (Member) Councillor Tracy Colyer (Member) Councillor Theresa Coull (Member) Councillor John Cowe (Member) Councillor John Divers (Member) Councillor Amber Dunbar (Member) Councillor Jérémie Fernandes (Member) Councillor David Gordon (Member) Councillor Juli Harris (Member) Councillor Sandy Keith (Member) Councillor Elaine Kirby (Member) Councillor Scott Lawrence (Member) Councillor Marc Macrae (Member) Councillor Paul McBain (Member) Councillor Neil McLennan (Member) Councillor Shona Morrison (Member) Councillor Bridget Mustard (Member) Councillor Derek Ross (Member) Councillor John Stuart (Member) Councillor Draeyk van der Horn (Member) Councillor Sonya Warren (Member) Councillor Ben Williams (Member) Clerk Name: Tracey Sutherland Clerk Telephone: 07971 879268 Clerk Email: committee.services@moray.gov.uk Page 4
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REPORT TO: SPECIAL MORAY COUNCIL ON 26 FEBRUARY 2025 SUBJECT: 2025/26 BUDGET AND 2025 TO 2028 FINANCIAL PLAN BY: DEPUTE CHIEF EXECUTIVE (ECONOMY, ENVIRONMENT AND FINANCE) 1. REASON FOR REPORT 1.1 To ask Council to set the level of Council Tax for 2025/26, to agree the Council’s revenue budget for 2025/26 and to consider the Council’s Financial Plan for 2025 to 2028. 1.2 This report is submitted to the Council in terms of the Council's Administrative Scheme section (II) (1) relating to setting the Council Tax and section (II) (22) and (23) relating to the approval of the annual estimates of capital and revenue expenditure for all services. 2. RECOMMENDATION 2.1 It is recommended that the Council approves: (i) A Council Tax increase of 10% for 2025/26 and indicative increases of 10% for 2026/27 and 6% for 2027/28; (ii) Provision of £4,821,000 for budget pressures for 2025/26, £111,000 for 2026/27 and £40,000 for 2027/28 as listed in APPENDIX 2; (iii) Budgeted expenditure of £294,197,000 for 2025/26; (iv) Indicative budgets for 2026/27 and 2027/28 as set out in APPENDIX 1; (v) Funding of £89,308,000 for Moray Integration Joint Board (MIJB) as set out in paragraph 6.6; and (vi) Use of ear-marked reserves of up to £683,000 for investment in transformation and up to £560,000 for Council priorities as set out in paragraphs 3.4 to 3.13. Item 3. Page 5
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2.2 It is recommended that the Council notes: (i) The conditions placed on the Council in terms of the settlement letter from the Cabinet Secretary for Finance and Local Government, subject to any announcements by Scottish Government; (ii) Uncertainty around the impact of the retention of £186.5 million funding dependent on teacher numbers; (iii) Projected additional savings requirements of £1,887,000 in 2026/27 and continuing thereafter as referred to in the Council’s Medium to Long Term Financial Strategy; and (iv) The results of staff consultation on previous savings approved subject to consultation as summarised in paragraph 5.9. 3. BACKGROUND 3.1 The Council’s revenue budget for 2025/26 is due to be considered in a difficult economic environment. After its dramatic increase in autumn 2022, inflation as measured by the Consumer Price Index (CPI) was on a steady downwards trajectory during 2024/25, even dipping below the Treasury target of 2% in September 2024, but then bounced back and has been variable over the past few months with no obvious trend. Many commentators expect the impact of the increases in employers National Insurance Contributions (eNIC) announced in the budget in October 2024 will result in increased levels of inflation thereafter. The Office of Budgetary Responsibility (OBR) latest forecast (October 2024) was for CPI to peak at 2.6% in 2025. Given CPI in November 2024 was 2.6% and the latest reported figure is 2.5% this may be an underestimate. Inflation rates clearly impact on pay claims. The very low rates of interest which the Council has benefited from in recent years are no longer available and that impacts on the Council’s ability to fund capital expenditure. This is a difficult environment in which to make financial decisions and prudence must be the watchword. 3.2 The Local Government Settlement is for one year only but the Council is setting its 2025/26 budget in the context of longer-term planning. In particular, the budget is proposed to be set in the context of the Corporate Plan and in the context of the Short to Medium and Medium to Long Term Financial Strategies. Underpinning both of these is the Transformation Strategy, a strategy which necessarily has a focus which is longer than the short term. 3.3 To facilitate longer term planning the Council has ear-marked reserves to be used in the furtherance of the Council’s priorities and to facilitate transformation of service delivery. A thematic approach to investment from these reserves is proposed for 2025/26. Item 3. Page 6
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Corporate Plan 3.4 The Council approved the Corporate Plan for 2024 to 2029 at its meeting on 28 February 2024 (paragraph 5 of the minute refers). The Council’s agreed priorities for that period are to: Tackle Poverty and Inequality; Build a Stronger, Greener, Vibrant Economy; Build Thriving, Resilient, Empowered Communities. 3.5 One of the actions under the theme of tackling poverty and inequality is to improve educational attainment. It is proposed to allocate £560,000 from the ear-marked reserve held for Council priorities to create an Intervention Fund for each school to target identified areas for improvement, specific to groups or cohorts, using a range of data/intelligence held, with a view to raising attainment/achievement based on the unique context of each school. This Intervention Fund would require a plan for each school where outcomes are identified and over the year evidence of impact is gathered and reported at the end of the next academic year. The funding is equivalent to 8 FTE main grade teachers and will be allocated on a pro-rata basis depending on pupil numbers in each school. Transformation 3.6 The latest report on the Council’s Transformation Strategy was approved by Corporate Committee on 28 January 2025 (paragraph 9 of the draft refers). 3.7 Digital is a cross cutting theme within Transformation, underpinned by a separate Digital Strategy. In order to scope future service developments and develop a programme of digitisation it is proposed to invest up to £200,000 from the ear-marked reserve estimated to be £5,792,000 at 31 March 2025 for Transformation. This investment will be used to help develop the Council’s digital vision and ambition with the assistance of external expertise, learning from best practice examples such as East Renfrewshire Council’s progress with digital transformation and data analysis as cited in the recent Best Value report as well as being informed by national and industry led developments. A report with detailed proposals will be brought forward thereafter. 3.8 Another cross cutting theme is Workforce Changes. This theme is not yet developed and it is proposed to invest up to £250,000 from the ear-marked reserve for Transformation to develop business cases for proposals and if approved to commence implementation. The purpose of this work is to ensure pay and conditions are modernised and reflective of societal changes and demands with employment practices fit for the Council now and in the future. This will contribute towards an efficient and affordable workforce that is financially sustainable and protects long term employment and services. As part of this workstream it is proposed that a second phase of the review of the Council’s structure, which commenced with a review of the Council’s senior management structure, is commissioned, to complete a comprehensive review of the Council’s structures across services and grades. 3.9 Following the report to Council on 19 February 2025 on the Libraries Review, it is proposed to invest up to £90,000 from this reserve on developing proposals to restructure and transform Council services by engaging with communities with initial focus on the school and non-school library services and with a view to location in schools following transformation. This will seek to share and learn Item 3. Page 7
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from experience gained through networking with other local authorities and to engage with the community on co-design and delivery, which has a good fit with the Corporate priority of Building Thriving, Resilient, Empowered Communities. 3.10 The Council’s approach to climate change is referred to in the Corporate Plan and encapsulates two specific projects in the Transformation Strategy (LED lighting and solar panels). 3.11 To inject pace into resourcing and delivery of climate related projects, particularly those which can leverage in external funding to help the Council reduce the carbon impacts of its infrastructure and enhance Moray’s natural capital, it is proposed to release £143,000 from the Council’s ear-marked reserve for Transformation, augmented by £10,000 contribution from the Economic Development budget, for the creation of a temporary Grade 11 Senior Project Manager for two years. Two years is viewed as the minimum reasonable duration to allow for transition from planning and bidding through to early stages of delivery. This post would be hosted within the Climate Team but would work very closely with the Property Team and more generally across services to maximise external funding and internally funded spend to save projects as well as ensuring timely and efficient use of the recently announced Climate Emergency capital grant (subject to grant terms) in 2025/26, which is expected to exceed £500,000. 3.12 As well as funds like Salix for energy efficiency measures in property and for natural capital, and renewable energy funding sources such as “planting” funding from Woodland Trust, Trees for Life, and Scottish Forestry, a significant funding opportunity is through Just Transition and the postholder would work with the Climate Change Team and others to progress some of the high level projects being scored highly in work currently commissioned through funding in the 2024/25 budget for the next round of Just Transition funding which will deliver savings both financially and in carbon for the Council. 3.13 Monitoring and Evaluation would initially be through the Climate Change Members/ Officer Working Group, but also through the Transforming the Council Board and through the annual report on Climate Change Routemap. Strategic Approach 3.14 The Council approved a Short to Medium Term Financial Strategy on 26 June 2024 (paragraph 11 of the Minute refers), following the previously agreed savings hierarchy of: Transformation/ Efficiencies – Income generation – Service cuts/cessation the strategy set out three approaches to delivering savings: the Thematic approach (encapsulating asset management, energy efficiency, procurement, workforce strategy and debt management); the Review-led approach (ensuring the budget coheres with the Corporate Plan), and the Partnership approach, working with Moray Integration Joint Board (MIJB) to assist in developing their plans to bring spend back in line with budget. The strategy recognised further services savings would be needed. The Strategy aimed to remove the reliance on reserves to balance the budget for 2025/26. As this report recommends a budget for 2025/26 which balances without use of reserves, thus removing the long-standing structural deficit, future short to medium term financial strategies will focus on meeting any Item 3. Page 8
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forecast shortfall in funding to cover inflation and growth in demand, following the issues set out in the Council’s Medium to Long Term Financial Strategy. 3.15 The Council approved its Savings Delivery Plan on 25 September 2024 (paragraph 11 of the Minute refers) following the Strategy agreed in June. Savings were approved as part of the Delivery Plan and further savings approved by Council on 22 October 2024 and 4 December 2024. The position reported to Council on 21 January 2025 was a residual budget gap for 2025/26 of £4,816,000. 3.16 The local government settlement provisionally announced on 12 December 2024 included £289 million variously described as for local priorities / to preserve the settlement in real terms. The Council’s share of this funding is £3,900,000, 1.6% of the Council’s budget and just over half of the provision for inflation. Despite this welcome increase significant savings are still required to balance the budget. The shortfall in funding for the direct cost of the increase in employers’ National Insurance Contributions (eNIC) to the Council amounts to £1,280,000 with further indirect costs estimated at £400,000, which adds to the budget gaps reported prior to the UK October budget. 3.17 Notwithstanding this, the draft budget on APPENDIX 1 shows the budget gap as being removed. A summary of the movement from the position immediately following the settlement letter as reported to Council on 21 January 2025 is set out in the table at paragraph 4.28. The various components of the movement are derived from the options set out in APPENDIX 3 to that report: Scottish Government grant, Council Tax, savings. Scottish Government grant is discussed in paragraphs 4.19 and 4.20 of this report, Council Tax in paragraphs 4.23 to 4.26 and further savings proposals in paragraphs 5.1 to 5.7. 3.18 A review of the Council’s indicative 10 year Capital plan was recognised as necessary when the budget for 2024/25 was approved. A mechanism for capping the capital plan so the cost of borrowing does not exceed 10% of revenue funding was approved by Council on 22 October 2024 (paragraph 9 of the Minute refers) and the capital plan for 2025 to 2028 at high level with the indicative capital plan for 2028 to 2036 was approved by Council on 21 January 2025 (para 7 of the draft minute refers). The plan and indicative plan are within the limits of affordability recognised by the Council and this is a significant step towards financial stability, albeit one which will bring challenges in managing the Council’s assets. However, the Medium to Long Term Financial Strategy already recognised that reducing the Council’s asset base was a requirement. 3.19 The Council approved its updated Medium to Long Term Financial Strategy on 4 December 2024 (para 10 of the draft minute refers). This Strategy considers the main cost drivers and variables which affect the Council’s budget setting process: general inflation, demographics, funding (from Scottish Government, from Council Tax and from charges for services), the cost of salaries and wages, contract inflation and the cost of borrowing. It identifies key areas of influence as Transformation, asset management, the Place-Based approach and sustainable development. The Strategy shows that scenarios reflecting the mid-case for key assumptions indicate a continuing need to identify savings of between £5 million and £6 million annually across the life of the Strategy. This is a high-level estimate to assist future planning and reflects flat cash funding Item 3. Page 9
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from Scottish Government, resulting in budget pressures from pay awards and other inflation increases which exceed the mid-case estimate of council tax rises marginally above inflation. For long-term planning purposes the Council needs to identify a direction of travel in terms of its service developments and capital plans which reflects the likely need to continually squeeze expenditure. In the short term the Council can use more detailed and more finely tuned financial assumptions and it is currently anticipated that savings of £1,887,000 will be required in 2026/27. This reflects the Council’s above inflation increase in Council Tax for 2026/27. 3.20 Horizon planning and a long term approach is vital to ensure the Council is prepared for challenges ahead. However, the Council operates in an ever- changing environment and its strategic approaches must also be flexible in order to reflect this. Income 3.21 The Council receives around 80% of its revenue funding from Scottish Government. Over the last eleven years, this grant funding has increased marginally in cash terms, and by considerably less than the cost of new duties required of local authorities. Inflation increases for pay and prices and growth in demand for services in some areas have therefore had to be balanced by efficiency savings and cuts in services. The Council has made savings totalling £68 million since 2010/11 and it is increasingly difficult to identify areas where further savings can be made whilst delivering the statutory duties of a local authority. 3.22 Income from Council Tax receipts is the other main source of income for the Council. As part of its longer term approach to financial planning the Council adopted a policy position on Council Tax when the budget for 2024/25 was set, aiming to recover across a two year period the position lost by the Council Tax freeze imposed for 2024/25 by Scottish Government. This gives a minimum Council Tax increase of 7% in 2025/26 and 6.2% in 2026/27 and these increases have been used in all budget forecasts reported to the Council during 2024/25. They remain the policy minimum and as part of the budget setting process for 2025/26 the Council should consider the option of further increases in Council Tax to lessen the level of savings required from reduced service provision. 3.23 The following ranges of increases are used for illustration of the impact: Annual increase in Council Tax budget 2025/26 £000s 2026/27 £000s 2027/28 £000s Mid-case from Medium to Long Term Financial Strategy: 3% each year 1,868 1,936 2,005 Policy minimum per Council 2024: 7% - 6.2% - 3% 3,952 7,758 2,148 Increase 8% - 8% - 5% 4,474 4,860 3,434 Increase 9% - 6.2% - 3% (Note 1) 4,995 3,876 2,189 Increase 10% - 10% - 6% 5,516 6,103 4,201 Increase 12% - 12% - 6% 6,558 7,388 4,356 Item 3. Page 10
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Note 1 – responses to the budget survey indicated a 9% increase in Council Tax in 2025/26 was on average acceptable to the respondents Reserves 3.24 For a number of years the Council relied on the use of free general reserves – and latterly an ear-marked “working reserve” - to balance the budget. The Council had been steadily reducing its reliance on reserves and only budgeted to use £10,000 (to cover one-off expenditure) to balance the 2021/22 budget. In that year, the Council was able to retain £1.9 million under the Business Rates Incentivisation Scheme (BRIS) and also planned to use financial flexibilities granted for the pandemic, both time-limited funding, totalling £3.1 million. The base expenditure budget was therefore still overcommitted. That overcommitment was carried forward into 2022/23, with increased expenditure to cover inflation and other budget pressures unmatched by proposed savings requiring the use of reserves of £13.9 million to balance the budget. The underlying overspend in 2022/23 was carried forward into 2023/24 and increased marginally, in an environment of significantly increased inflation. In year savings reduced the underlying overspend but overcommitment by Moray Integrated Joint Board (MIJB) resulted in the Council making a prudent provision of £5 million to meet its share of that potential overspend. The position since 2017/18 is summarised below. In 2025/26 there is no projected use of reserves to balance the budget, a successful culmination of the Short to Medium Term Financial Strategy. Budgeted use of general / working reserves Actual (est act 2024/25) £m £m 2017/18 7.611 3.8% 4.615 2.3% 2018/19 4.720 2.4% 3.787 1.9% 2019/20 2.094 1.0% - 0% 2020/21 2.348 1.1% - 0% 2021/22 0.010 0.0% (5.838) 2022/23 13.881 5.4% 1.562 0.7% 2023/24 15.423 5.9% 14.211 5.2% 2024/25 10.225 3.7% 6.477 2.3% 3.25 The Council needs to retain a certain amount of free general reserves in case of unforeseen contingencies or emergencies. The Council’s updated reserves policy was approved by Council on 25 September 2024 (paragraph 15 of the Minute refers) is to hold £6 million as free reserves. 3.26 In addition to the free general reserves the Council has a short life reserve described as the working reserve which has been used to balance the budget in the last three financial years whilst the Council has tackled its underlying overcommitment to spend. The balance on this reserve at 31 March 2025 is projected to be £2,131,000 and it is proposed that when the actual out-turn for the year has been confirmed that the balance will be transferred into either the ear-marked reserve for Transformation or the ear-marked reserves for Council priorities, with recommendations brought for consideration by Council in the autumn of 2025 following approval of the audited accounts for 2024/25. Item 3. Page 11
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3.27 The balances projected for 31 March 2025 for all ear-marked reserves are set out in APPENDIX 1 to this report. Investment totalling £1,253,000 from the ear- marked reserves for Transformation and for Council priorities form a key part of the budget proposals in this report and have been set out in paragraphs 3.4 to 3.10. 4. REVENUE BUDGET 4.1 The draft revenue budget for 2025/26 to 2027/28 is set out in APPENDIX 1 to this report. The budget proposed for 2025/26 is described in detail below. 4.2 The starting point for the 2025/26 budget is the budget for 2024/25. The brought forward Devolved School Management (DSM) balance and other funding from ear-marked reserves is removed and budgets adjusted to reflect the reinstatement of temporary savings and the full year effects of budget adjustments made for part of 2024/25 only. The picture is complicated by commitment of ear-marked reserves, by funding for schools where funding is made on a financial year basis but implemented on an academic year basis and by slippage in the implementation of some new requirements. The resultant starting point for the 2025/26 budget is expenditure of £286,636,000. A summary of the adjustments to the 2024/25 budget is set out below: £000s Budget reported to Council 19/01/2025 (32 budget monitoring) 286,636 Less funded from DSM etc (1,430) Review of provisions to be carried forward (174) Budget to be carried forward 285,032 Adjustments to c/f budget: Reinstate one-off savings 123 Deduct one-off expenditure 2024/25 (1,988) Add one-off expenditure approved 2025/26 28 Opening budget 283,195 Provision for pay and prices 4.3 Provision of £6,300,000 is made within the budget for pay awards and for some other inflationary increases in expenditure. This does not include provision for pay awards for adult social care staff and children’s services staff where they deliver services delegated to MIJB and this is discussed in section 6 of this report. 4.4 Although the rate of inflation has dropped in recent months it is currently above the UK Treasury target of 2%. The amount allowed for pay awards is one of the high risk areas of the proposed budget. An allowance for a 3% increase has been included as the highest affordable level. 4.5 Other standard inflationary increases included are for PPP/PFI contracts, Early Learning and Childcare (ELC) partner providers, school and other transport contracts and the cost of utilities. Item 3. Page 12
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Financing costs 4.6 The Council funds a significant proportion of its capital plan from prudential borrowing. No charge is made to the revenue budget for loans repayment or interest until the year after which the loan is taken out. Consequently the budget for 2025/26 shows the estimated impact of planned capital expenditure in 2024/25. The provision has been reviewed in the light of the quarter three estimate of borrowing required in 2024/25 and current interest rates. A revised increase of £3,200,000 has been allowed for. Interest rates increased steadily throughout 2024/25 but have stabilised and recently shown a slight decrease. No economic commentators expect the extremely low rates of interest prevalent in relatively recent years to recur. The consequent pressure of higher interest rates is a factor in the reduction in the capital plan approved on 21 January 2025. Treasury Management is the subject of another report on the agenda for today’s meeting and the affordability of the Council’s capital plans measured by the Prudential Indicators set out in that report. New burdens 4.7 New burdens are created for local government by legislation passed by the Scottish Government. The budget of £4,598,000 comprises funding mandated to be used to increase payments to external providers of ELC, children’s social care and adult health and social care to cover the increase in the Real Living Wage; the MIJB share of funding for eNIC; additional funding Additional Support for Learning; funding for the extension of universal free school meals in primary schools; increased funding for Discretionary Housing Payments (DHP), and new funding for children’s mental health care provision. Budget pressures 4.8 Provision is also made within the draft budget for budget pressures which are not funded by Scottish Government. Some of these have already been approved by Council, some recognised as pressures in previous budget papers and some are newly emerging pressures. These are listed in APPENDIX 2 to this report and described below and total £4,704,000 for 2025/26. Indicative amounts are also shown for 2026/27 and 2027/28 where these are currently quantifiable. 4.9 Funding for schools under the Devolved School Management (DSM) scheme is formula-driven, with the majority of funding distributed on the basis of school roll numbers. A high level estimate of the impact of projected school rolls based on the latest school census is included. The latest census showed school rolls falling and revised pressures from those provisionally reported when the budget for 2024/25 was set are included. This amounts to £99,000 in 2025/26, with a reduction in DSM allocation currently forecast for 2026/27. A decreased cost is shown in budget pressure to show the trend. 4.10 A one-off budget pressure of £50,000 for examination of the Local Development Plan was previously approved and is included. Related to that is a pressure for Transportation Appraisal for the Local Development Plan – an increase in the previously approved budget pressure is recommended due to increased cost following delay of the work following the pandemic and a budget pressure of £75,000 for 2025/26 is now recommended to be recognised. Item 3. Page 13
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4.11 The Council will incur legal expenses from the Public Local Inquiry into plans for the wind farm at Aultmore. A budget pressure of £70,000 is recommended to be included. 4.12 The Council had previously approved a budget pressure of £30,000 arising from the introduction of the Deposit Return Scheme and this has been rolled forward. 4.13 The Council has been able to capitalise the cost of principal bridge inspections in recent years as remedial construction work followed from the inspections. The Council’s engineers advise this will not be the case in 2025/26 and is unlikely to be the case in the near future. It is recommended that a pressure of £80,000 is recognised in respect of the statutory duty of principal bridge inspections. 4.14 Following a recent tender for the maintenance of heating systems in the Council’s corporate buildings contract price increases have created a budget pressure of £100,000 and it is recommended that provision for this is made within the budget. 4.15 The increase in employers National Insurance contributions (eNIC) thresholds and contribution rates is estimated to add £4,000,000 to the Council’s pay bill. £800,000 of this relates to MIJB services and the balance of £3,200,000 is included as a budget pressure. In addition it is estimated that £400,000 will be added to the cost of external care providers (excluding those commissioned by MIJB). A total budget pressure of £3,600,000 is therefore recommended. This will be partly offset by additional grant funding and Scottish Government as part of their draft budget has committed to funding 60% of direct costs to local authorities. Estimated funding of £1,920,000 in respect of Council direct costs is included, with the share of funding related to MIJB included in new burdens as a pass through provision. Scottish Government are continuing to press UK government for 100% funding for direct costs but there are no indications at present that any additional funding will be made available. 4.16 There are areas of emerging budget pressure which cannot be currently quantified with any degree of accuracy, but where clear trends of increased expenditure are emerging. Three areas in particular have been identified for consideration as part of the budget setting process: supply teachers; out of area placements, and cyber security. The supply teacher budget for 2024/25 is forecast to be overspent. This budget covers absence caused by sickness (other than very short term sick leave, which falls to the school devolved budget) and maternity leave. By its nature it is difficult to influence. Out of area placements are made for children requiring specialist support which is not available within Moray. These placements are made on the basis of assessed needs. Whilst every effort is made to keep children within Moray this is not always possible and recently a trend of increased out of area placements has been seen. In common with other public sector organisations the Council has seen significant increases in the volume of cyber attacks. Increasing amount of ICT staff time is involved in ensuring that the Council’s systems remain secure. The longer term implications of this are yet to be assessed. It is recommended that a contingency for emerging budget pressures is included and APPENDIX 1 includes £600,000 for this purpose. Item 3. Page 14
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4.17 Council on 19 February 2025 were asked to consider a £50,000 one-off budget for a car parking study which would inform and support both Levelling Up Fund (LUF) and Moray Growth Deal (MGD) projects by commissioning a capacity review of car parking in and adjacent to Elgin City Centre. The requirement for this comes from a combination of additional pressures identified on current capacity arising from additional parking demand generated from projects within the MGD, LUF and Elgin Town Board Investment Plan and other development proposals and limitations on capacity of the St Giles shopping centre car park due to structural issues. This is provisionally included as a service development. 4.18 With these additions the total budgeted revenue expenditure for 2025/26 before savings is £302,085,000. Funding Government grant 4.19 The bulk of the Council’s funding is from government grant, given as a combination of General Revenue Grant (GRG) and Non Domestic Rates distribution. The finance circular 10/2024 includes funding of £228,115,000 from General Revenue Grant and Non Domestic Rate Income. An estimate of £2,400,000 further funding in respect of eNIC has been included. Amounts undistributed when the finance circular was issued but now notified are also included where the corresponding expenditure is included in base budget: Discretionary Housing Payments (£818,000) and Scottish Disability Assistance (£42,000). DHP funding is paid in two tranches and any funding not used for payments of DHP is clawed back. The first tranche funding for DHP is £80,000 higher than in 2024/25 and so £80,000 has been included in new burdens (see paragraph 4.7). Funding of £485,000 now distributed for Additional Support for Learning is included in New Burdens. 4.20 Further funding of £3,109,000 remains undistributed. Payment will be dependent on the Council attaining target teacher numbers. Exact details of how the scheme will operate have not been confirmed. The budget assumes that the Council will receive £1,500,000. This is considered to be a prudent and a fairly risk averse assumption. 4.21 The UK government has announced draft allocations of funding for Extended Producers’ Responsibility for packaging (pERP) and the provisionally announced funding of £3,438,000 is included. Additional expenditure is not considered likely to be required in 2025/26. As there is lack of clarity about funding or expenditure requirements in future years a reduced amount has been included in the indicative budgets. 4.22 With these amendments budgeted funding from Scottish Government and UK Government in 2025/26 totals £236,877,000. Council Tax 4.23 As mentioned in paragraph 3.19, the policy position approved for Council Tax for 2025/26 was a minimum increase of 7%. This has been used as a planning base assumption in all financial planning reports to date. Based on that increase Council Tax income for 2025/26 was forecast to be £55,756,000. The Item 3. Page 15
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budget set out in APPENDIX 1 includes an increase of 10% in Council Tax for 2025/26. The estimated income to be generated by that increase, based on current collection rates and anticipated growth in the Council Tax base, is £57,320,000. This is £1,564,000 more than would have been generated had the policy minimum of 7% been adhered to and therefore makes a significant contribution towards closing the remaining budget gap. 4.24 As a signal of future intention the indicative budgets for 2026/27 and 2027/28 in APPENDIX 1 include Council Tax increases of 10% and 6% respectively. 4.25 The proposed Council Tax by banding is listed in the table below. These figures do not include charges for water and waste water which are collected alongside Council Tax on behalf of Scottish Water, nor do they take into account any Council Tax Reduction, discount or exemption which may be due in individual cases. Council Tax 2024/25 Council Tax proposed 2025/26 Band A £953.79 £1,049.17 Band B £1,112.76 £1,224.04 Band C £1,271.72 £1,398.90 Band D £1,430.69 £1,573.76 Band E £1,879.77 £2,067.75 Band F £2,324.87 £2,557.36 Band G £2,801.76 £3,081.95 Band H £3,505.19 £3,855.71 4.26 The proposed Council Tax is an annual increase of £143.07 on Band D or £2.75 per week. 4.27 The resultant budgeted income to the Council for 2025/26 leaves a shortfall of income compared to expenditure of £6,449,000, which requires to be found from savings, with savings totalling £4,449,000 already identified. Further savings are proposed in section 5 of this report. 4.28 The movement from the position reported to Council on 21 January 2025 is set out below: £000s Residual budget gap reported 21 January 2025 4,816 Less: Increase in grant funding notified (exc new burdens) (860) Assumed funding related to teacher numbers (1,500) Increase in Council Tax proposed (1,540) Add new budget pressures recognised 1,105 Other minor adjustments (21) Residual budget gap to be met from savings 2,000 Item 3. Page 16
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5. SAVINGS 5.1 Savings totalling £3,234,000 have been approved to date and a further £700,000 savings from the ELC Change Management Plan are now recognised, along with an estimate of £75,000 savings from the LED lighting replacement programme. Indicative savings of £440,000 from the Improvement and Modernisation Programme are also included, bringing the total savings approved to date to £4,449,000. Some of these savings were subject to consultation and the results of the consultation are included in a separate report on this agenda. The remaining budget gap is £2,000,000. 5.2 Further savings for 2025/26 totalling £2,000,000 are presented to Council today. 5.3 The Council’s budget includes a vacancy factor to reflect time lags in appointing replacement staff when staff leave and also that new staff are generally appointed at a lower point on the salary scale point. This factor does not apply in a uniform fashion across the Council, as there are many service areas where vacancies must be covered, either by relief staff, other staff working overtime or by out-sourcing the work. This mainly applies to front-line service delivery, such as teachers, home carers, leisure facilities staff. Staff vacancies in services as varied as legal services and fleet services may be covered by out-sourcing when unavoidable work has to be carried out. It is proposed that this factor is increased by £150,000, pro rata to the 3% pay award budgeted for 2025/26. 5.4 Savings of £110,000 are proposed from recharging the HRA for advice tendered to Council house tenants by the Money Advice Service on the basis that the service increases the rent collected for the HRA. 5.5 Savings accrue from the current maintenance contract for CCTV and it is proposed that the budget is therefore reduced by £10,000 in 2025/26 with potential further savings of £5,000 in each of 2026/27 and 2027/28. 5.6 The housing service have been engaging with a supported accommodation provider over the last 6 months to try and identify options for them to maximise their income and be less reliant on grant funding from the Council. As a result of this work, the service provider can continue to operate with little detriment to quality or quantity with a 10% reduction (£24,500) to the current level of funding (£245,000). This is based on a 3-year direct award given the negotiated position and with inflationary uplifts in 2026/27 and 2027/28. 5.7 The balance of the savings gap is proposed to be met by reducing the central contingency held to cover the Council’s share of MIJB overspend. This is currently £5,000,000, based on the £10,000,000 shortfall recognised when the budget for 2024/25 was approved. The MIJB have made savings during 2024/25 and the Council’s share of the current projected overspend is £2,600,000. Further savings are expected to be realised in 2025/26 and despite the considerable budget pressures faced by MIJB it is considered prudent to reduce the Council’s contingency by £1,600,000. Item 3. Page 17
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Workforce Implications 5.8 Moray Council on 22 October and 4 December 2024 approved a range of budget savings proposals (paragraphs 12 and 22 of the respective minute and draft minute refer). As a result, 8 employees (7.4 full time equivalent) were impacted however there are no compulsory or voluntary departures anticipated. In addition, managers at 4 Early Learning Centres were affected by contractual variations. The workforce implications for other employees at those centres is yet to be determined and any reduction will be achieved through natural employee turnover and appropriate contractual changes. The Council’s Transform measures were instigated seeking to manage and support the changes and contraction required proactively. 5.9 Responses to the formal consultation were received both individually and collectively from groups of staff and workforce representatives allowing full engagement on the impact on staff of the proposed changes. The feedback has been fully considered and the mitigations and actions already being taken as part of the measures to manage the proposals are considered to be appropriate, therefore, there are no changes proposed arising specifically from the feedback received. Responses have been provided to all formal consultation feedback from both trade unions and employees with Head of Service and service manager input where required. 6. MIJB 6.1 The Council approved the delegation of Children’s Services to MIJB as from 1 April 2023 with 2023/24 being a transitional year, during which all financial risks and rewards sat with the Council, i.e. any overspend would be met by the Council, any underspend returned to the Council. From 2024/25 the budget for Children’s Services was subsumed within the overall MIJB budget. 6.2 As a delegated service MIJB has complete freedom to decide how the budget is used. However, the responsibility for setting the budget to be transferred to MIJB sits with the Council. In common with recent years there are conditions on funding for adult social care set as part of the settlement, and the Council must comply with those. The letter from the Cabinet Minister for Finance and Local Government to Council Leaders and Chief Executives states that the funding allocated to Integration Authorities for Free Personal and Nursing Care and for payment of the Real Living Wage (RLW) in adult social care commissioned services should be additional and not substitutional to each Council’s 2024/25 recurring budgets for adult social care services that are delegated. 6.3 Accordingly the Council is restricted in what it can decide regarding funding for adult social care. In particular it cannot apportion part of the budget gap as a savings target for adult social care. As in 2024/25 it is recommended that no Council funding is passed to MIJB is respect of pay awards for adult social care. The Council has passed on as recurring funding to MIJB the pro rata share of Scottish Government funding for pay awards and will pass on the pro rata funding for eNIC when confirmed. Item 3. Page 18
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6.4 In discussion with MIJB officers they have expressed preference for all MIJB funding from the Council including Children’s Services to be treated in the same way: no uplift for pay awards or other inflationary increases and no savings targets. On review this is considered to be cost neutral to the Council. 6.5 On that basis Council funding for MIJB on 2025/26 would therefore be: £000s Moray Council core funding 2024/25 Health & Social Care 65,672 Improvement grants 1,060 Children’s Services 19,483 Base core funding 86,215 Add: Health & Social Care pass through funding: RLW uplift Personal and Nursing Care 2,098 197 Children’s social work – directed funding for caseload reduction 254 Children’s social work – RLW for commissioned services 296 Children and Young People community mental health services (directed funding) 198 Trauma informed training (directed funding) 50 TOTAL BASE FUNDING MIJB 2025/26 89,308 7. RISK 7.1 The Short to Medium Term Financial Strategy specifically identifies risk as an important component of short to medium term financial planning. The importance of considering risk is heightened as the Council’s reserves are depleted, as that reduces the capacity the Council has to absorb unexpected or unplanned costs. 7.2 The proposed budget for 2025/26 is subject to the following specific risks: • The level of the pay award is unknown at present but claims are currently running above the provision proposed in the budget. • Price inflation will impact on areas where no provision has been made for inflationary increases and this will add pressure to budgets. Budget Managers will need to control their expenditure to absorb such pressure if possible and may have to reduce service levels or identify further savings. The provision made for contract inflation may not cover all calls upon it • Budget pressures may exceed the available allocation. The Corporate Management Team will be responsible for closely monitoring the issues identified and will report any emerging issues to committee. Item 3. Page 19
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• Unforeseen factors can impact on the Council’s position. There is no allowance made for unforeseen contingencies. • Council Tax income may be less than anticipated, depending on the collection rate, rate of growth of Council Tax base, income from the levy and loss of income under the Council Tax Reduction Scheme and other reliefs. • There may be slippage in achieving savings; savings may not be achieved in full, or the impact of spend-to-save measures may be less than anticipated. • The impact on the Council of external economic factors is unpredictable, and could affect income generated from local taxes and from charges for services, as well as demand for services and benefit entitlement. • The impact of extreme weather events is unpredictable and can be costly. Such events are increasing in frequency. The winter maintenance budget is for a mild winter with no leeway increased impact. • The MIJB still has a significant operating deficit in 2024/25 and forecasts significant budget pressures in 2025/26. The Council is obliged to meet its share of any overspend, despite having no influence on the operation of the Board. 7.3 In addition to cumulative risks around workforce, equalities, socio-economic and rights impacts set out in the summary of implications below, more general risks to the Council may also arise from the cumulative impact of savings on the Council and these will increase as the scale of savings increases. Generally, a reduction in staff without a reduction in the Council’s activities and duties leads to a less resilient organisation. This can be manifested in a number of different ways: reduction in capacity for partnership and cross service working; reduction in capacity to response to emergencies; reduction in capacity to support and develop Council staff. In addition to this staff vacancies can also impact on capacity and on service continuity. Analysis of the workforce impacts of the savings agreed in 2024 however indicates that the Council does not anticipate significant adverse cumulative impacts at this point. 8. SUMMARY OF IMPLICATIONS (a) Corporate Plan and 10 Year Plan (Local Outcomes Improvement Plan (LOIP)) Financial Planning is integral to the Council’s overall planning processes and allows the Council to direct resources to its agreed priorities. (b) Policy and Legal The Council is required by statute to set a balanced budget before the start of the financial year. The requirement is set out in the Local Government Finance Act 1992 (section 93). Item 3. Page 20
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(c) Financial implications The proposed budget for 2025/26 balances without use of reserves and so removes the underlying deficit in the Council’s finances. However, further savings are expected to be required in the future to cover inflationary increases and increased demand for services. (d) Risk Implications The specific risks relating to the budget are identified in paragraph 7.2. As there are always uncertainties around budget setting there is always risk attached and the uncertainties and therefore the risk are heightened the further forward into the future the budget extends. (e) Staffing Implications There are with the exception of the additional post proposed to be funded from reserves to deal with climate change issues and the funding for educational attainment, no direct staffing implications arising directly from this report. (f) Property There are no property implications arising directly from this report. (g) Equalities/Socio Economic Impact There are no proposals in this report which directly impact on this area. (h) Climate Change and Biodiversity Impacts There are no implications for climate change and biodiversity arising from this report. (i) Consultations CMT and Heads of Service are involved throughout the budget process, which underpins this report. 9. CONCLUSION 9.1 Council Tax is proposed to be increased by 10% in 2025/26 with indicative increases of 10% in 2026/27 and 6% in 2027/28. 9.2 Savings of £2,000,000 are proposed to balance the draft budget for 2025/26. 9.3 Investment totalling up to £1,243,000 from ear-marked reserves for Transformation and Council priorities is proposed. Author of Report: Lorraine Paisey, Chief Financial Officer Background Papers: Confidential Background Papers (Members only – CMIS log in required): Item 3. Page 21
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Item 3. Page 22
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APPENDIX 1 BUDGET OVERVIEW AS AT 26 FEBRUARY 2025 2024/25 £000s 2025/26 £000s 2026/27 £000s 2027/28 £000s Revenue Expenditure Service allocations (assuming prior year savings are achieved) 272,015 285,032 294,197 301,735 Adjustments to brought forward figure: (288) (1,837) 215 39 Opening budget 271,727 283,195 294,411 301,774 Pay and price increases 4,530 6,300 7,400 7,660 Increase in Loan Charges per budget 800 3,200 1,700 1,450 New Burdens 2,922 4,598 0 0 Budget pressures: - Approved or noted for future years when budget set 9,047 493 281 40 - Approved since budget set 5,724 Emerging 4,211 (170) 0 Service developments: - Approved 290 88 0 0 - Proposed 0 0 0 0 295,040 302,085 303,622 310,924 Revenue Funding General Revenue Grant / NDRI 222,386 228,841 233,312 235,645 New burdens funding not included in grant above 2,922 4,598 0 0 UKG funding for pERP 3,438 2,000 2,000 Council Tax 51,804 57,320 63,423 67,624 Funding from General Reserves: Funded from Ear-marked reserves: Transformation 360 Council priorities 831 0 0 MGD cash flow 0 0 0 Working reserve 6,555 0 Service concession retrospection 0 3,000 4,526 284,857 294,197 301,735 309,795 Item 3. Page 23
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2024/25 £000s 2025/26 £000s 2026/27 £000s 2027/28 £000s SAVINGS REQUIRED 10,182 7,889 1,887 1,129 Savings Summary Savings Approved: Approved when budget set 7,217 2,837 103 Temporary savings 123 176 157 Further savings approved 2,169 2,436 755 6 Indicative Savings from I&M Programme 293 440 0 Other savings proposed 380 2,000 5 Savings to be identified 867 1,123 10,182 7,889 1,887 1,129 Projected year end position: Free Balance on General Reserves 6,000 6,000 6,000 6,000 Estimated Balance on Working Reserve 1,956 1,956 1,956 1,956 Estimated Balance on Transformation Reserve 5,792 5,792 5,149 5,149 Estimated balance on Council priorities / Workforce 2,303 2,303 1,743 1,743 Estimated balance on MGD cash flow reserve 4,000 4,000 4,000 4,000 Estimated balance from retrospective service concession saving 7,526 7,526 4,526 0 Note: the use of the Transformation Reserve and the Council priorities reserve has not been factored into the above balances for 2025/26, as the profile for use has yet to be developed. The total approved use is shown as having been completed by end 2026/26 Item 3. Page 24
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APPENDIX 2 BUDGET PRESSURES Approved 2025/26 2026/27 2027/28 £000s £000s £000s Education School roll numbers 99 (203) Moray Growth Deal – EY STEM MC 03/03/21 39 40 Economic Growth & Development Local Plan examination MC 08/02/24 50 Aultmore PLI 70 Environmental & Commercial Local Development Plan Transportation Appraisal P&R 23/03/21 75 25 Deposit Return Scheme MC 01/03/23 30 Bridge inspections 80 Housing & Property Corporate property central heating servicing contract 100 Corporate / cross service eNIC – direct costs 3,200 eNIC – indirect costs 400 Contingency for emerging budget pressures 600 250 TOTAL 4,704 111 40 Item 3. Page 25
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REPORT TO: SPECIAL MEETING OF MORAY COUNCIL ON 26 FEBRUARY 2025 SUBJECT: HOUSING REVENUE ACCOUNT (HRA) BUDGET PROPOSAL 2025/26 BY: DEPUTE CHIEF EXECUTIVE (ECONOMY, ENVIRONMENT AND FINANCE) 1. REASON FOR REPORT 1.1 This report presents details of the proposed Housing Revenue Account (HRA) Budget for 2025/26 for approval. 1.2 This report is submitted to Council in terms of section (II) (1) of the Council's Administrative Scheme relating to the setting of rent levels for council houses, garages etc. 2. RECOMMENDATION 2.1 It is recommended that the Council: (i) consider and note the main findings of the Housing Business Plan 2024/25 review as detailed in section 3; (ii) agree the proposed HRA Budget for 2025/26 (APPENDIX I) and Housing Investment Plan (APPENDIX II), including the level of HRA reserves in line with the Housing Reserves Policy as detailed in paragraph 6.13; (iii) consider and note the results of consultation with tenants on options for a three-year rent strategy as detailed in section 5; (iv) agree Council house rents increase of 6% each year for 2025/26, 2026/27 & 2027/28; (v) agree that garage rents and garage site rents are increased by 6% each year for 2025/26, 2026/27 & 2027/28; (vi) agree provision of £310k for service developments, as detailed in paragraph 7.15; (vii) note the three-year projection to 2027-28 (APPENDIX III); and (viii) note that the prudential indicator for debt affordability may be marginally exceeded in years two and three of the projection, Item 4. Page 27
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however this is subject to a number of variables which will be monitored and managed per paragraphs 3.17 & 3.18. 3. BACKGROUND Housing Business Plan 3.1 The Housing Business Plan was first developed in 2005 when Councils were required to demonstrate that they had the financial means to improve their housing stock to meet the Scottish Housing Quality Standard (SHQS). At that time, Moray Council’s Business Plan was developed by Arneil Johnston Consultants, working alongside Council staff. 3.2 The Business Plan assesses the affordability and feasibility of Council plans in relation to housing over a 30-year period. It considers risk scenarios and tests the affordability of the Plan against these potential risks. The Business Plan is reviewed on a three-year cycle and provides the assurance that the Council is able to fund its housing activities within the constraints of the accounting regime for housing. 3.3 The Business Plan was last fully reviewed in 2022 and was reported to Moray Council on 22 February 2022 (paragraph 5 of the minute refers). The 2022 Review identified that the Council could afford to build 50 new properties per annum over the subsequent 3 years based on a rent increase of CPI plus 1%. 3.4 Although the Business Plan was not due to be substantively reviewed for a further two years, given the extent of macro-economic changes over the past two years, notably the significant increases in inflation and interest rates, a limited interim review was undertaken in 2023 and 2024 to ensure the impact of these material changes were adequately considered when setting the budget and planning for future years. 3.5 The sustained increase in borrowing costs, comprehensive restructure of rents and accelerated investment programme represented material changes to some of the assumptions which underpinned the previous Business Plan, therefore provision was made to commence a review in 2024, to be considered when setting the budget for 2025/26. Objectives 3.6 The review of the Business Plan sought to consider: • The development of a revised baseline business plan with updated assumptions; • A review of investment plans for current stock; • The latest New Build investment programme; • A review of the housing debt profile to ensure debt affordability thresholds are managed over the course of the 30-year plan; and • Impact assessment of alternative business plan scenarios. Rent Affordability 3.7 Using the 2023/24 Annual Return on the Charter (ARC) data from the Scottish Housing Regulator (SHR), Arneil Johnston compared the Council average rent levels with Scottish Local Authority peers (Figure 1) as well as with locally operating non specialist peer Registered Social Landlords (RSLs) (Figure 2). Item 4. Page 28
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Figure 1: Peer Local Authority Average (APT is abbreviation for apartment) Figure 2: Moray v Local RSL Average Rent 2024/25 (ARC inflated) 3.8 The current 2024/25 Council stock list was used to arrive at an average rent of £75.09 (52 weeks including service charges) and this was compared to ARC average rents from 2023/24 with the proposed rent increase applied for 2024/25. It shows that after the 2024/25 rent increase and rent harmonisation, Moray Council average rents remain the lowest amongst all social landlords in Scotland, 12% lower than local authority and 31% lower than RSL comparators. Business Plan Assumptions 3.9 The HRA business plan modelling tool is designed to prepare 30-year projections, and to model the HRA over this period. The tool has been designed in a way that enables the Council to assess the appropriate levels of borrowing required to achieve its objectives and commitments. The business plan is based on agreed assumptions on stock numbers, current rental policy, inflationary rate increases, known income and expenditure, fixed costs, new build commitments and loan charges relating to borrowing. 3.10 The baseline model was built following detailed analysis of the Council budget for 2024/25 and actual income and expenditure over the previous year. To this base budget the following planning assumptions have been considered to arrive at the 30-year baseline business plan: • Income Inflation; • Expenditure Inflation; • 30-Year Capital Investment Levels; • Stock and New Build Assumptions; and • Debt Assumptions. Item 4. Page 29
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3.11 It is noted that there is considerable scope for variance in several of these elements beyond the control of the Council, including the level of inflation and interest rates, whilst the extent of investment in existing and new build properties is periodically reviewed to ensure it remains affordable. 3.12 The business plan model reflects an opening HRA stock of 6,359 units. From this, the Council anticipates building 268 units and acquiring 30 properties, therefore adding a further 298 units to the stock. The current new build programme includes development up to 2029/30 and will be subject to review in line with strategic need and availability of funding prior to this juncture. 3.13 Following the considerable investment in the accelerated investment programme in 2024/25, there is provision within the plan for investment levels within the plan to fully attain the Scottish Housing Quality Standard (SHQS), component replacement, Energy Efficiency Standard for Social Housing (EESSH) and also an estimated provision for anticipated further enhancement of minimum standards. Debt Affordability 3.14 The Council has typically set a prudential limit of 35% as a reference point for the HRA, against which to consider debt affordability. This ensures that the baseline business plan is fundable and limits the proportion of rental income required to service debt. 3.15 Based on the assumptions outlined above and the presumption of annual rent increases of CPI + 1%, the starting debt affordability ratio is 29% in 2024/25 and the additional borrowing required results in the plan would reach a peak debt affordability rate of 51% in Year 20, with average debt affordability over the 30 years at 45%. 3.16 In order to meet the aspirations to fully achieve SHQS/EESSH standards in all of the Council’s stock, the accelerated investment programme initiated in 2024/25 is required to continue into 2025/26. This upfront expenditure and implicit borrowing requirement, as well as recent increases in interest rates, means the debt affordability threshold being exceeded looking forward to the three-year outlook of the current budgeting process. 3.17 By consulting with tenants on a minimum rental increase of 6% annually for three years, the HRA would achieve the ambitious investment objectives whilst limiting the extent and duration of the threshold being exceeded. Based on this, the debt affordability would be 30% in 2025/26, peaking at 35.6% in 2026/27, falling back to 35.2% in 2027/28 and beneath the threshold thereafter. 3.18 It is emphasised that there are considerable variables which may contribute to the outturn being lower or higher within this period, some of which such as interest rates and inflation are external. Notwithstanding, the proposed approach is deemed to be prudent in meeting the Council’s responsibilities as a landlord and balancing the stock investment required to meet this with keeping the rents as affordable as possible. Other variables such as reactive repairs expenditure, void property refurbishment costs and planned maintenance programmes are all subject to greater management control and considerable focus will be applied to monitoring these across the budgetary Item 4. Page 30
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period. The Head of Housing and Property Services will also work with the Chief Financial Officer to monitor the actual position in relation to the prudential limit and consider the need for any changes to spend and borrowing plans. 4. HOUSING INVESTMENT PLAN 4.1 The proposed Housing Investment Plan for 2025/26 – 2027/28 is detailed in APPENDIX II. 4.2 Whereas the Council is generally performing well as a landlord across the range of benchmarked performance indicators, there remains an identified need for improvement in relation to SHQS and EESSH. As at 31 March 2024, 22.6% of the Council’s properties met the SHQS compared with a local authority average of 77.8%, whilst the figure for EESSH was 65.1% compared with an average of 88.7%. 4.3 In addition to the routine repairs and maintenance of the Council’s housing stock, the principal focus of the Housing Investment Plan therefore remains on completing the investment required to meet the provisions of the SHQS and EESSH. 4.4 Following the considerable progress made in the course of 2024/25 to upgrade properties to SHQS/EESSH standards, with an outturn in excess of 80% projected, the broader Housing Investment Plan is now able also to reflect the investment priorities which tenants identified within the most recent tenant survey. The key components of this focus will be kitchens, bathrooms and window replacements. 4.5 The budgetary provision within this investment plan enables the upgrading of windows in at least 300 properties, 100 combined kitchen and bathroom upgrades and a further 100 new bathrooms. Accordingly, over the three-year period of this programme, 900 properties (14% of stock) would have replacement windows, 300 would have kitchen & bathrooms replaced (4.7% of stock) and a further 300 would have bathrooms upgraded (4.7% of stock). Provision is also made for up to 250 heating system replacements and improved insulation for 100 properties annually, over and above the exceptional budget for SHQS compliance in 2025/26. 5. RENT INCREASE CONSULTATION 5.1 Section 25 of the Housing (Scotland) Act 2001 allows landlords to increase rent (or any other charge payable) under a Scottish secure tenancy so long as they give tenants at least four weeks’ notice of the increased rent due to be paid. Before they issue this notice, landlords must consult with tenants affected by the proposal and be able to demonstrate how they have taken regard of their views in reaching a decision about rent increases. 5.2 In order to meet the HRA Business Plan requirements and ensure continued financial viability, it was determined that the Council consult tenants on options which were equivalent to or above the amount required to meet investment objectives, with reference to the prudential borrowing indicator. Item 4. Page 31
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5.3 To afford certainty within the HRA planning assumptions as well as for tenants in relation to future rent levels, the consultation was predicated on a consistent uplift for three financial years – 2025/26 – 2027/28. 5.4 The consultation for 2024/25 – 2027/28 ran from 20 November 2024 until 3 January 2025, with surveys issued to all tenants by letter or email according to their communication preference. 5.5 Tenants were invited to express their preference for one of two options based on what each option will allow us to deliver: Option one – 6% i.e. Business Plan minimum Option two – 7% i.e. Business Plan optimum 5.6 A total of 798 responses were received, representing a 12.9% response rate: 753 tenants (94.4%) opted for Option one – 6% 45 tenants (5.6%) opted for Option two – 7% 5.7 The response rate was 21% higher than last year’s response of 659 returns. Given the clear preference for option one, this is the recommended rent increase for the years 2025/26, 2026/27 and 2027/28. 5.8 Based on this rent increase, the Council’s rents will remain the lowest amongst local authority landlords and will continue to be affordable across the range of property types and sizes. 6. PROJECTED HRA OUTTURN 2024/25 6.1 On 28 February 2024, the Council agreed its HRA Budget for 2024/25 (paragraph 8 of the Minute refers). Reports on budgetary performance have been presented to Housing and Community Safety Committee throughout 2024/25. 6.2 The most recent HRA budget monitoring report presented to the Housing and Community Safety Committee on 11 February 2025 (paragraph 9 of the draft minute refers) identified the main variations in the projected outturns to 31 March 2025, which have subsequently been updated with the most recent position as follows:- Expenditure Supervision and Management 6.3 An underspend of £171k is projected. This variance arises from an underspend in staffing costs arising from vacancy levels and lower than budgeted pension contributions (£320k), partially offset by anticipated overspends in voids (£75k) and insurance (£74k), based on cost of refurbishment and higher premiums respectively. The voids expenditure in this budget arises from staffing, whereas the reference in paragraph 6.5 pertains to property costs. Sheltered Housing 6.4 An underspend of £10k is anticipated based on lower than budgeted energy and non-domestic rates expenditure. Item 4. Page 32
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Repairs and Maintenance 6.5 An overspend of £1,128k is projected. This is comprised of £788k in void costs due to the higher cost of refurbishment, £754k in response repairs due to higher demand and £200k in property fees, attributable to the accelerated programme. These will be partially offset by an underspend of £546k in planned/cyclical programmes, arising from lower than anticipated external decoration and fabric repairs undertaken and a higher than budgeted surplus in the DLO (£68k), arising from the higher volume of work undertaken for the accelerated investment programme. Financing Costs 6.6 An underspend of £227k is projected due to lower than estimated interest costs on borrowing. Bad and Doubtful Debts 6.7 An underspend of £60k is projected based on current rent collection and write-off levels. CFCR 6.8 The level of Capital from Current Revenue (CFCR) is projected to be £1,336k lower than budgeted, in order to bring the year-end balance in line with the reserve provision. Downsizing Incentive Scheme 6.9 There is no variance currently projected. Service Developments 6.10 An underspend of £50k is anticipated, due to the additional time required to recruit to posts. 6.11 Total expenditure on the HRA is projected to be £726k lower than budgeted. Income 6.12 Total income to the HRA is projected to be £152k higher than originally budgeted for 2024/25, with £127k in additional rental income arising from improved performance and £28k in additional recharges. This is anticipated to be partially offset by lower than anticipated interest on revenue balances (£3k) due to the lower interest rates. HRA reserves 6.13 Overall, a surplus balance of £2.250m is projected for the HRA budget in 2025/26. This is determined as a prudent level of reserves under the terms of the Housing Reserves Policy approved by Housing & Community Safety Committee on 15 November 2022, incorporating: • £500k - minimum policy provision; • £550k - risks associated with the development programme in current market conditions; • £700k – risks associated with interest rates in current market conditions; and • £500k – provision for inflation, including any additional pay award or other cost increases in 2025/26. Item 4. Page 33
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7. PROPOSED HRA BUDGET 2025/26 7.1 As in previous years, Officers have considered in detail the base budget agreed for 2025/26. Each cost centre within the HRA budget is scrutinised by the Head of Housing and Property, Finance staff and the budget service managers and this has included an assessment of the continued impact of economic conditions on both income and expenditure. 7.2 APPENDIX I details the proposed HRA Budget for 2025/26. Comments on the proposed budget can be made as follows:- Expenditure 7.3 The total expenditure proposed amounts to £28.838m. The main areas of expenditure are considered below. Supervision and Management 7.4 The budget proposed for supervision and management costs is £6.455m. This provides for a 3% pay award. For comparison, the Council’s supervision and management costs for 2024/25 were 25.2% below the local authority average. Sheltered Housing 7.5 The Sheltered Housing Budget is increased to £0.066m for 2024/25. Repairs and Maintenance 7.6 Proposed revenue expenditure for Repairs and Maintenance of £10.183m. Capital expenditure for Planned Maintenance & Investment Programmes and Improvements of £26.522m is included in the Housing Investment Plan, summarised in APPENDIX II. These budgets make provision for typical levels of activity as well as the strategic investment priorities. For comparison, the Council’s repairs and maintenance expenditure for 2024/25 was 1.7% higher than the local authority average, which is attributable to the lower level of capital improvement and is being monitored in the expectation this margin will fall in line with the investment programme. Garages and Garage Sites 7.7 Charges in relation to garages and garage sites provided by the HRA have previously been reviewed bi-annually. From 2025/26, it is intended that these charges are subject to an annual uplift of 6% in line with house rents for each of the three years to 2027/28. Item 4. Page 34
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New Build Housing Programme 7.8 The Scottish Government has identified affordable housing as a key national strategic priority and committed to fund the building of 110,000 affordable housing by 2032. 7.9 Following wide consultation with stakeholders, the Local Housing Strategy (LHS) 2019-24 was agreed by Communities Committee on 2 April 2019 (paragraph 8 of the minute refers). A revised LHS is being prepared for 2025. The key objectives of increasing the supply of affordable housing and tackling homelessness are included in the Council’s Corporate Plan 2023. The Housing Need and Demand Assessment 2023 (HNDA) suggests that 3,827 new affordable houses are required over a 20-year period to address existing and projected housing need in Moray. 7.10 Expenditure of £12.117m is budgeted for in relation to the new build programme for 2025/26, with £3.666m and £5.536m allocated for 2026/27 and 2027/28 respectively, representing the anticipated schedule of forthcoming developments. In each of these years a provision of £2m for acquisitions is also made. 7.11 On 15 November 2022, the Housing and Community Safety Committee approved the Council’s Strategic Housing Investment Plan (SHIP) (paragraph 10 of the Minute refers). In accordance with Scottish Government guidance, the SHIP over-commits on available grant funding. The SHIP includes several projects assigned to the Council’s own development programme, and several projects which are unassigned. The HRA Business Plan 2022 made provision for 50 Council house completions per year. Given there is some uncertainty with regards to the capacity of the local housing associations to develop, it can be assumed that the scale of the Council’s house building programme will be a key factor in ensuring that the available resources are fully utilised in Moray. Developments which are in the pipeline are continuing to progress, with 245 units included in the Business Plan between 2023/24 and 2027/28. Individual projects will, however, be subject to value for money assessments until fully committed, to ensure they remain affordable. The HNDA output will direct funding priorities in subsequent years and in line with the previous Business Plan finding that continuing with a development/acquisition programme of 50 properties per year actually reduces the debt affordability %, albeit with a higher debt per unit, it is envisaged this level of output remains realistic and prudent. Financing Costs 7.12 Financing costs are projected at £8.413m for 2025/26. This is predicated on current interest rates, noting the potential for fluctuation in the course of the year. Capital from Current Revenue (CFCR) 7.13 CFCR enables the Council to utilise available revenue resources to help fund capital projects and reduce the requirement for prudential borrowing. The Housing Investment Plan sets out the repairs and maintenance priorities for 2025/26. These will be financed through the HRA revenue and capital budgets. For 2025/26, it is proposed to set CFCR at £3.089m to allow the Council to maintain an HRA balance of £2.250m at year end. Item 4. Page 35
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Downsizing Incentive Scheme 7.14 It is proposed to maintain the annual budget for the Downsizing Incentive Scheme at £72k for 2025/26. Service Developments 7.15 Service developments of up to £310k have been included in the budget for 2025/26 to make provision for emergent priorities, including continuation of the Tenant Assistance Fund and of which £110k is assigned for enhanced money advice provision for tenants. Specific details will be reported to service committees in the course of the reporting year. Income 7.16 Rental income is the primary source of income for the HRA. The HRA must balance (or the deficit must be funded from General Services). The level of income generated within the HRA continues to influence what the Council can fund with regards to its housing activities. Rent collection rates remain in the upper quartile compared with other local authority landlords. 8. SUMMARY OF IMPLICATIONS (a) Corporate Plan and 10 Year Plan (Local Outcomes Improvement Plan (LOIP)) The provision of new affordable housing, the maintenance of the Council’s housing stock and dealing with homelessness are priorities identified within the Corporate Plan, the Council’s Local Housing Strategy, the Strategic Housing Investment Plan (SHIP) and the Housing and Property Service Plan. (b) Policy and Legal Proposed approaches to achieving investment objectives aligned with the rent setting policy are set out within this report and will be subject to reporting to service committees in the course of the year. There are no legal implications arising from this report. (c) Financial Implications The 2024/25 Business Plan review provides for the legislative work programmes that the Council will be required to deliver in future years and sets a rental framework within which it can be sustainably delivered. It concluded that an increase of 6% over three years would ensure that the Council’s housing activities remain fundable and affordable. (d) Risk Implications The 2024/25 Business Plan review included detailed risk assessment and sensitivity analysis, which demonstrated that the HRA remains within acceptable limits under the range of scenarios tested. Given the extent of economic uncertainty, this position will remain under review in the course of 2025/26. (e) Staffing implications There are no direct staffing implications arising from this report. (f) Property None. Item 4. Page 36
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(g) Equalities/Socio Economic Impact There are no equalities/socio economic impacts directly arising from this report. (h) Climate Change and Biodiversity Impacts Delivery of the Housing Investment Programme will make a significant contribution to meeting EESSH standards within the Council’s stock, thereby reducing energy ratings and carbon emissions. Similarly, the Council’s affordable housing supply programme is predicated on delivering low-carbon developments. (i) Consultations This report has been prepared in consultation with Finance staff. Consultation on this report has also been carried out with the Chief Financial Officer, the Head of Governance, Strategy and Performance, Democratic Services Manager and Senior Managers within the Housing and Property Service and any comments received are reflected in this report. 9. CONCLUSION 9.1 This report presents the HRA Budget proposals for 2025/26. It also includes a three-year financial projection to 2027/28. Following consultation, a rent increase of 6% is recommended for 2025/26, 2026/27 and 2027/28 in line with the rental structure. Author of Report: Edward Thomas, Head of Housing and Property Background Papers: Held by author Ref: SPMAN-1285234812-1788 Item 4. Page 37
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Housing Revenue Account APPENDIX I Proposed Budget 2025/26 Service Description Annual Budget 2024-25 Projected Outturn to 31 Mar 2025 Projected Variance to 31 Mar 2025 Draft Budget 2025-26 Variation between 2024- 25 & 2025-26 inc / (dec) Expenditure £,000 £,000 £'000 £'000 £'000 Supervision & Management 6,081 5,910 171 6,455 374 Sheltered Housing 64 54 10 66 2 Repairs and Maintenance 9,694 10,822 (1,128) 10,183 489 Financing Costs 7,188 6,961 227 8,413 1,225 Bad & Doubtful Debts 250 190 60 250 0 CFCR 2,641 1,305 1,336 3,089 448 Downsizing Incentive Scheme 72 72 0 72 0 Service Development 200 150 50 310 110 Total Gross Expenditure 26,190 25,464 726 28,838 2,648 Income £,000 £,000 £,000 £,000 £,000 Non-dwelling rents 260 260 0 275 15 House rents 25,126 25,253 127 28,034 2,908 IORB 437 434 (3) 350 (87) Other income 152 180 28 179 27 Total Income 25,975 26,127 152 28,838 2,863 Surplus / (Deficit) 215 663 878 0 Balance carried forward 1,587 2,250 Estimated Balance at end of Period 2,250 2,250 Item 4. Page 39
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Housing Investment Plan 2025/26 to 2027/28 APPENDIX II 1. The investment proposals for 2025/26 to 2027/28 can be summarised as shown below:- Investment Heading Programme 2025/26 2026/27 2027/28 Response Repairs West Area 969 998 1,028 East Area 1,521 1,567 1,614 Central Area 874 900 927 Gas Heating Repairs 636 655 675 Total 4,000 4,120 4,244 Void Repairs Void House Repairs 2,000 2,060 2,122 Estate Works Garage Upgrades 28 29 30 Asbestos 383 394 406 Landscape Maintenance 92 95 98 Estates/Forum Upgrades 237 244 251 Total 740 762 785 Cyclical Maintenance Gas Servicing 432 445 458 Solid Fuel Servicing 16 16 17 Air Source Heat Pump Servicing 67 69 71 Solar and battery 25 26 27 PIV 50 52 53 Smoke Detector Servicing 16 16 17 EICR 5 Year programme 100 103 106 External decoration & fabric repairs 860 886 912 General Servicing 30 31 32 Fire Risk Assessments & associated works 160 165 0 Total 1,756 1,809 1,693 Planned Capital Kitchens and Bathrooms 1,300 1,339 1,379 Bathroom Replacements 620 639 658 Central Heating 1,900 1,900 1,900 Doors and Windows 3,000 3,090 3,183 EESSH - Insulation 750 750 750 EESSH - Social Housing Net Zero Fund 500 0 0 EESSH 16,700 2,000 2,000 Major works 700 721 743 Roof replacements 1,052 1,084 1,116 Total 26,522 11,522 11,728 Planned Revenue Rainwatergoods 299 308 317 Rainwatergoods - Roof Moss Cleaning 239 246 254 Roof and Fabric Repairs 0 0 Item 4. Page 41
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Plumbing Upgrades 62 64 66 Electrical Upgrades 150 155 159 Safety & Security 26 27 28 Sheltered Housing 12 12 13 Decoration Vouchers 124 128 132 Shower Installations 62 64 66 Total 974 1,003 1,033 Other investment Disabled Adaptations 400 412 424 Enabling Projects 51 53 54 Total 451 465 478 Proposed Investment 36,443 21,741 22,084 2. Capital expenditure proposed for 2025/26 to 2027/28 can be summarised as:- 2025/26 £’000 2026/27 £’000 2027/28 £’000 CAPITAL EXPENDITURE Investment Programme Capital 26,522 11,522 11,728 New Build ph10 12,117 2,555 111 New Build Ph11 0 1,111 5,425 Acquisitions 2,000 2,000 2,000 TOTAL Capital expenditure 40,639 17,188 19,264 3. For the same period, capital funding is projected at:- Projected Income 2025/26 £’000 2026/27 £’000 2027/28 £’000 Funding Ph10 - govt grant -8,285 -1,694 0 Funding Ph10 - commuted sums 0 0 0 Funding Ph10 - growth deal 0 0 0 Funding Ph11 - govt grant 0 -1,100 -3,476 Acquisitions grant -1,000 -1,000 -1,000 SHNZ grant 0 0 0 CTAX disc 2nd homes -650 -650 -650 CFCR -3199 -2581 -3656 Borrowing -27,505 -10,163 -10,482 TOTAL -40,639 -17,188 -19,264 Item 4. Page 42
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Housing Revenue Account APPENDIX III Service Description Annual Budget 2025-26 Annual Budget 2026-27 Annual Budget 2027-28 Expenditure £,000 £,000 £,000 Supervision & Management 6,455 6,762 6,965 Sheltered Housing 66 68 70 Repairs and Maintenance 10,183 10,490 10,634 Financing Costs 8,413 10,770 11,382 Bad & Doubtful Debts 250 265 281 CFCR 3,089 2,468 3,539 Downsizing Incentive Scheme 72 72 72 Service Developments 310 100 100 Total Gross Expenditure 28,838 30,995 33,043 Income £,000 £,000 £,000 Non-dwelling rents 275 292 310 House rents 28,034 30,244 32,343 IORB 350 275 200 Other income 179 184 190 Total Income 28,838 30,995 33,043 Surplus / (Deficit) 0 0 0 Balance carried forward 2,250 2,250 2,250 Estimated Balance at end of Period 2,250 2,250 2,250 Item 4. Page 43
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REPORT TO: SPECIAL MORAY COUNCIL ON 26 FEBRUARY 2025 SUBJECT: TREASURY MANAGEMENT STRATEGY STATEMENT AND PRUDENTIAL INDICATORS BY: DEPUTE CHIEF EXECUTIVE (ECONOMY, ENVIRONMENT AND FINANCE) 1. REASON FOR REPORT 1.1 The purpose of this report is to ask Members to approve the Treasury Management Policy and Strategy and the Investment Strategy for 2025/26 and to approve the indicators which will be used to measure the Council’s performance in capital investment decisions. 1.2 This report is submitted to Council in terms of Section III B (8) of the Council’s Administrative Scheme relating to the implementation and monitoring of the Treasury Policy Statement dealing with the management of all money and capital market transactions in connection with cash funding resources of the Council. 2. RECOMMENDATION 2.1 It is recommended that Council approves: (i) the Treasury Management Strategy Statement for 2025/26; (ii) the Investment Strategy for 2025/26 in APPENDIX 1; (iii) the Prudential Indicators and Limits for 2025/26 in APPENDIX 3; and (iv) the Treasury Management Policy Statement in APPENDIX 5. 2.2 It is recommended that Council notes the indicative Prudential Indicators and limits for 2026/27 and 2027/28. 3. BACKGROUND 3.1 The Council has adopted the CIPFA Code of Practice for Treasury Management in the Public Sector 2021 (the Code) and the Local Government Investment (Scotland) Regulations 2010. All treasury management activities are carried out in accordance with the Code and regulations. Item 5. Page 45
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3.2 The primary requirements of the Code are as follows: • An approved Treasury Management Policy, which sets out the policies and objectives of the Council’s treasury management activities. • An annual treasury management strategy report to Council for the year ahead and an annual review report to Council of the previous year. 3.3 The Local Government (Scotland) Act 2003 requires the Council to adopt the CIPFA Prudential Code for Capital Finance in Local Authorities and to produce the prudential indicators set out in the Prudential Code. These indicators are designed to support and record affordable and sustainable capital investment and treasury management. 4. TREASURY MANAGEMENT STRATEGY 2025/26 Current Treasury Position 4.1 The Council’s borrowing and investments as at 31 January 2025 are set out in the table below: Actual Rate £000 % Fixed Rate Debt PWLB 158,347 5.18 LOBO 10,100 3.95 Market 23,300 5.00 Variable Rate Debt PWLB - - LOBO - - Temporary Borrowing – Local Authorities 116,000 5.28 Total External Borrowing 307,747 5.66 Other Liabilities 48,499 n/a Total Gross External Debt 356,246 n/a Investments Short Term Investments (50,375) 5.21 Net Debt 305,871 n/a PWLB is the Public Works Loan Board. LOBO is Lender’s Option Borrower’s Option where the lender has the option to propose an increase to interest rates at set dates and the borrower (the Council) has the option to either accept the new rate or to repay the loan. Temporary borrowing is borrowing for periods of less than twelve months. Other liabilities are those relating to the financing of capital expenditure, finance leases and Public Private Partnership (PPP) arrangements. Item 5. Page 46
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Interest Rates Forecast 4.2 The Council has appointed Arlingclose as treasury management advisers and receives advice on investment, debt and capital finance issues. The Council recognises that responsibility for treasury management decisions rests with the Council and cannot be delegated to the adviser. 4.3 The Bank of England (BoE) reduced the Bank Rate to 4.50% on 6 February 2025 with the next meeting due on 20 March 2025. The authority’s treasury adviser Arlingclose is forecasting further reductions in the Bank Rate during 2025, on a gradual basis, amid concerns around inflation. 4.4 From February 2024 to February 2025, gilt yields (the interest rates paid on UK Government Bonds) exhibited continued volatility. Yields climbed through 2024, reaching a peak of 5.2% in January 2025, driven by persistent inflation concerns and government borrowing expectations. However, by early February 2025, the 10-year gilt yield fell to 4.5%, supported by a global bond rally and growing expectations of Bank of England rate cuts in response to slowing economic growth. Fiscal policy decisions, inflation trends, and central bank actions remain key drivers, with markets anticipating further fluctuations as monetary policy adjusts in the UK, Eurozone, and US. 4.5 A more detailed economic and interest rate forecast provided by Arlingclose is attached at APPENDIX 4. Borrowing Strategy 2025/26 4.6 The Council’s main objective when borrowing money is to strike an appropriately low risk balance between securing low interest costs and achieving cost certainty over the period for which funds are required. The flexibility to renegotiate loans should the Council’s long-term plans change is a secondary objective. 4.7 Given the significant cuts to public expenditure and in particular to local government funding, the Council’s borrowing strategy continues to address the key issue of affordability without compromising the longer-term stability of the debt portfolio. In recent years short-term interest rates have been lower than long-term rates and it has been more cost effective in the short-term to either use internal resources, or to borrow short-term. However, in recent months this trend has changed. 4.8 The benefits of either using internal resources or borrowing short-term are monitored regularly against the benefits of borrowing longer term. The Council’s advisers assist with this. The Council may borrow additional sums at long-term fixed rates in 2025/26 with a view to keeping future interest costs low, even if this causes additional cost in the short-term. However, given the relative stability of market rates the focus has been on keeping costs low in the short to medium term and that is likely to continue in 2025/26. 4.9 It is good practice to spread the profile of loan maturity over a number of years so as to spread the risk of re-financing at a time of high interest rates and the treasury advisors also assist in determining the period over which longer terms loans are taken out. Item 5. Page 47
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4.10 The Council has previously raised the majority of its long-term borrowing from the PWLB but could consider long-term loans from other sources including banks and local authorities. The Council may also investigate the possibility of issuing bonds and similar instruments, in order to lower interest costs and reduce over-reliance on one source of funding in line with the CIPFA Code, although previous investigation of the implications of this resulted in rejection of this option. 4.11 The Council will continue to borrow short term loans, normally one to twelve months, to cover cash flow shortages. 4.12 The approved sources of long-term and short-term borrowing are:- • HM Treasury’s PWLB lending facility (formerly the Public Loans Works Board) and any successor body • UK Local Authorities • Any Bank or Building Society authorised to operate in the UK. • UK public and private sector pension funds • Capital market bond investors • UK Municipal Bonds Agency PLC and other special purpose companies created to enable joint local authority bond issues The UK Municipal Bonds Agency plc was established in 2014 by the Local Government Associations as an alternative to the PWLB. It plans to issue bonds on the capital markets and lend the proceeds to Local Authorities. This is a more complicated source of finance than the PWLB for two reasons: borrowing authorities are required to provide bond investors with a guarantee to refund their investment in the event that, for whatever reason, the agency is unable to; and there will be a lead time of several months between committing to borrow and knowing the interest rate payable. Any decision to borrow from the UK Municipal Bonds Agency will therefore be subject to a separate report to Full Council. 4.13 At 1 April 2024 the Council held £10.1 million of LOBO loans where the lender has the option to propose an increase in the interest rate at set dates, following which the Council has the option to either accept the new rate or to repay the loan at no additional cost. The Council will take the opportunity to repay the remaining LOBO loan at no additional cost if the opportunity arises. 4.14 The revised Prudential Code and Treasury Management Code of Practice published December 2021 states that it is not prudent for local authorities to make investment or spending decisions that increases the capital financing requirement and so leads to new borrowing unless directly and primarily related to the functions of the local authority. In short, the Council is not permitted to borrow to invest primarily for financial return. 4.15 The revised code reminds Local Authorities that the prime objective of their treasury management investment activities is the security of funds, and they should avoid exposing public funds to unnecessary or unquantified risk. It is not prudent to make any investment or spending decision where any financial returns are either related to the financial viability of the project in question or otherwise incidental to the primary purpose of the Local Authority. Item 5. Page 48
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Debt Rescheduling 4.16 The PWLB allows Councils to repay loans before maturity, at a cost. Other lenders may also be prepared to negotiate premature redemption rates. This will be closely monitored with regards to the LOBO loan (£10.1m) and Market Loan (£23.3m). The Council will take the option to repay these loans at no additional cost if such an opportunity arises. 4.17 Changes in the rules regarding the premature repayment of PWLB loans have adversely affected the scope to undertake meaningful debt restructuring in recent years and there is no indication that this will change significantly during 2025/26. Financial Derivatives 4.18 In the absence of any legal power to do so, the Council will not use standalone financial derivatives such as swaps, forwards, futures and options. Derivatives embedded into loans and investments may be used and the risks they present will be managed in accordance with the overall treasury risk management strategy. 5. INVESTMENT STRATEGY 2025/26 5.1 The Local Government Investment (Scotland) Regulations 2010 require the Council to approve an annual Investment Strategy. This has been included as APPENDIX 1 to this report. 5.2 The primary principles governing the Council’s investment criteria is the security of capital and liquidity of its investments. The Council will also aim to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. Where balances are expected to be invested for more than one year, the Council will aim to achieve a total return that is equal or higher than the prevailing rate of inflation in order to maintain the spending power of the sum invested. Under the current economic climate of inflation above the UK Treasury target and with recent reductions in interest rates this may be challenging in the short to mid-term. 5.3 The Council may invest its surplus funds with any of the Approved Counterparties listed in APPENDIX 2, subject to the cash and time limits shown. 6. TREASURY MANAGEMENT PRUDENTIAL INDICATORS 6.1 The key objectives of the Prudential Code are to ensure that capital investment plans of the Council are affordable, prudent and sustainable; risks are proportionate, and decisions are taken in accordance with good professional practice. To demonstrate these objectives the Code sets ten prudential and treasury indicators designed to support and record capital investment and treasury decision making. These are detailed in APPENDIX 3. 6.2 It is a statutory requirement under Section 93 of the Local Government Finance Act 1992 for the Council to produce a balanced budget. In particular, a local authority must calculate its budget requirement for each financial year to include the revenue costs incurred from capital financing decisions. Item 5. Page 49
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Affordability 6.3 The fundamental objective of affordability is to ensure that capital plans remain within sustainable limits. 6.4 Setting affordable limits for borrowing within a prudential framework is a specific requirement and helps ensure that the further objectives of sustainability and prudence are addressed. The Council has adopted a Performance Indicator (PI) of the percentage of revenue budget planned to be spent on servicing debt as an additional method of ensuring affordability. This is regularly reported as part of capital plan monitoring and is currently set at 10%. The three-year capital plan for 2025/28 and indicative 10-year capital plan reported to Council on 20 January 2024 has been set ensuring the affordability indicator is met. 6.5 Given the agreed restrictions on the capital plan the Council does not envisage difficulties for the immediate future (ie next two or three years). The Treasury Management Team, in partnership with the Council’s treasury advisors Arlingclose, will continue to monitor interest rates closely and take any necessary action to avoid risk to the Council’s finances. Sustainability 6.6 The sustainability of the Council’s finances underpins the overall financial framework and is supported by the Prudential Code. Sustainability of finances relates to the ability of the Council to sustain its current spending, tax and other policies in the long run without threatening Council solvency or defaulting on its liabilities or promised expenditure. Sustainability is gauged by the wider financial planning process and there are no prudential indicators specifically related to sustainability other than the affordability indicators. Prudence 6.7 The prudent level of borrowing is linked to ensuring that debt will only be for a capital purpose. It is also prudent that treasury management activities are carried out in accordance with good professional practice. Within the CIPFA Prudential Code, local authorities are required to adopt the CIPFA Treasury Management Code of Practice. 6.8 The Local Government in Scotland Act 2003 also requires the Council to determine and continuously review how much it can afford to allocate to capital expenditure. This is known as the “Affordable Capital Expenditure Limit”. 6.9 The Indicators and Limits for 2025/26 are based on the General Services Capital Plan approved by Council on 20 January 2025 and Housing Revenue Account Investment Plan presented in separate reports for consideration at this meeting. 6.10 Prudential Indicators are for 2025/26 only, and whilst the capital plan for General Services was approved for three years, 2025/28, the importance of the indicators, as well as volatility of interest rates, would deem it appropriate to continue setting them annually. Item 5. Page 50
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6.11 Actual outturn figures for 2023/24 have previously been reported to Moray Council on 25 September 2024 (paragraph 18 of the Minute refers) and these figures have also been included in the report for comparison purposes. 6.12 This report also updates the previously approved indicators for 2024/25 based on the latest estimated outturn reported to Council on 19 February 2025 and shows that the Council remains within previously approved limits for borrowing. 6.13 Implementation of the new International Financial Reporting Standard (IFRS) 16 Leases in 2024/25 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities on the balance sheet for all leases with a term of more than 12 months. The prudential indicators included in Appendix 3 incorporate the impact associated with the PPP/DBFM school leases. An exercise is currently underway to identify any further leases that may be impacted by IFRS 16 Leases. Once that exercise is complete any impact on the prudential indicators will be reported to Council as part of regular capital monitoring. 7. TREASURY MANAGEMENT POLICY STATEMENT 7.1 The Treasury Management Policy Statement sets out the framework for managing treasury activities. Its purpose is to ensure that treasury management is conducted prudently, effectively and in line with strategic objectives. 7.2 The Treasury Management Policy contained in APPENDIX 5 has been updated to reflect recommended wording in accordance with the CIPFA Code. 8. SUMMARY OF IMPLICATIONS (a) Corporate Plan and 10 Year Plan (Local Outcomes Improvement Plan (LOIP)) None specifically arising from this report. (b) Policy and Legal The Local Government in Scotland Act 2003 provides the powers to borrow and invest as well as providing controls and limits on these activities. The Council has adopted the CIPFA Prudential Code and the CIPFA Treasury Management in the Public Services Code of Practice and Guidance Notes (“the CIPFA Code”) which was revised in 2021. The Council also complies with the Local Government Investments (Scotland) Regulations 2010 (“the Regulations”). All Treasury Management activities are carried out in accordance with the CIPFA Code and the Regulations. (c) Financial implications All financial considerations are contained within the body of the report and the attached APPENDICES 1 - 6. Item 5. Page 51
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The net cost of Capital Investment and Treasury Management activities has a significant effect on the Council’s overall finances. When considering the level of future capital investment programmes, the Council should be aware of the impacts of proposed capital spend on the Revenue Budget. (d) Risk Implications The Council is aware of the risks of passive management of the treasury portfolio and, with the support of the Council’s treasury advisers, will proactively manage its investments and debt over the year. Capital expenditure is closely monitored and Budget Managers are aware of their responsibilities to manage budget allocations. (e) Staffing Implications None specifically arising from this report. (f) Property None specifically arising from this report. (g) Equalities None specifically arising from this report. (h) Climate Change and Biodiversity Impacts None specifically arising from this report. (i) Consultations This report has been produced in consultation with Arlingclose, the Council’s treasury advisors. 9. CONCLUSION 9.1 The adoption of the Treasury Management Strategy Statement and Treasury Management Policy Statement will ensure that the Council continues to adopt best practice in its treasury activities. 9.2 The Investment Strategy will ensure that the Council will achieve the optimum return on its investments whilst maintaining a high level of liquidity to allow flexibility and above all ensure that the Council’s investments are secure. 9.3 Establishing and subsequent monitoring of Prudential and Treasury Indicators will ensure that the Council has capital investment plans which are affordable, prudent and sustainable. 9.4 Prudential Indicators and Limits are proposed for 2025/26 only. Indicative figures for 2026/27 and 2027/28 are identified. Item 5. Page 52
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Authors of Report: Jamie Fraser, Finance Manager Background Papers: Held by author in accountancy section Ref: SPMAN-1293228629-1246 Item 5. Page 53
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APPENDIX 1 THE ANNUAL INVESTMENT STRATEGY 2025/26 1. Background 1.1 The Council will adhere to the Local Government Investment (Scotland) Regulations 2010 (the Regulations), the CIPFA Prudential Code and the CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes (“the CIPFA Code”) which was revised in 2021. 1.2 Both the Regulations and the CIPFA Code require the Council to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield. The Council’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving very low interest rates on investments. Where balances are invested for more than one year, the Council will endeavour to achieve a total return that is at least equal to the prevailing rate of inflation, in order to maintain the spending power of the sum invested. 1.3 The Annual Investment Strategy covers: • Creditworthiness Policy • Investment Strategy • Permitted Investments • Non Treasury Investments 2. Creditworthiness Policy 2.1 The Council’s creditworthiness policy has been formulated after consultation with Arlingclose, the Council’s treasury advisers. 2.2 In addition to credit ratings provided by the three main credit rating agencies, Fitch, Moodys and Standard & Poor, the following tools are used to assess credit risk: • Sovereign support mechanisms • Credit default swaps (where quoted) • Share prices (where available) • Corporate developments, news articles, market sentiment and momentum 2.3 The Chief Financial Officer maintains a counterparty list in compliance with the minimum criteria detailed in 2.4 which is submitted to the Council for approval as necessary. All credit ratings are monitored on an ongoing basis and the counterparty list is amended to reflect any changes. The current Counterparty List is shown as APPENDIX 2. 2.4 The current minimum criteria was approved by Full Council on 27 February 2019 (paragraph 5 of the Minute refers) and it is not proposed to alter these. Item 5. Page 55
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APPENDIX 1 The Council’s minimum criteria are: • Banks – the Council will use banks which have at least the following Fitch or equivalent ratings. - Long Term: BBB+ • Building Societies – the Council will include Societies which meet the criteria for Banks outlined above. • Money Market Funds – Long Term: AAAmmf (Fitch) or equivalent. 2.5 The Council banks with Bank of Scotland and at the current time it meets the minimum credit criteria. However, if the credit rating falls below the Council’s minimum criteria, Bank of Scotland will continue to be used for short-term liquidity requirements (overnight and weekend investments) and business continuity arrangements. 3. Investment Strategy 3.1 The Local Government Investments (Scotland) Regulations 2010 states that local authorities are required to adopt a strategy that identifies the different types of treasury risk for the type of investments utilised. A local authority may invest money for any purpose relevant to its functions under any enactment, or for the purposes of prudent management of its financial affairs. Such investments or types of investments are defined as permitted investments. The risks that these investments are exposed to are credit or security risk (of default); liquidity risk (risk of committing funds to longer term investments); and market risk (effect of market prices on investment value). 3.2 The primary principle governing the Council’s investment criteria is the security of capital and liquidity of its investments. The Council will also aim to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. 3.3 The Council’s in-house managed funds are mainly derived through cash-flow and the balance on the General Reserve. Investments will accordingly be made with reference to the Council’s cash flow requirements and the outlook for short-term interest rates. 3.4 Maximum investment levels with each counterparty will be set to ensure prudent diversification is achieved. Therefore a maximum deposit of £5 million can be placed with any one institution at any one time, with the exception of the Council’s Bankers when the limit is £10 million, and the Debt Management Office (DMO). Item 5. Page 56
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APPENDIX 1 3.5 Given the Council’s requirement for sufficient liquidity for cash flow purposes, the investment strategy continues to focus on the utilisation of an unsecured call account with Council’s Banker and money market funds as they offer the best return for investments with instant access. 4. Permitted Investments 4.1 The Council will undertake the most appropriate form of investments in keeping with investment objectives, income and risk management requirements and prudential indicators. The Council may invest its surplus funds with any of the counterparty types in the table detailed in paragraph 4.4 below, subject to the cash and time limits shown. 4.2 The permitted investments identified for the Council’s use are as follows: • UK Debt Management Office (DMO). This offers the lowest risk form of investment available to local authorities as it is effectively an investment placed with the UK Government. It is also easy to use as it is a deposit account and avoids the complications of buying and holding Government issued treasury bills or gilts. As it is low risk it also earns low rates of interest. The longest term deposit that can be made with the DMO is 6 months. • Bank (Unsecured). These are account deposits, certificates of deposit and senior unsecured bonds with banks and building societies. These investments are subject to the risk of credit loss via a bail-in should a bank be failing or likely to fail. Diversifying investments is crucial to managing bail-in risk in addition to determining proportionate counterparty maturity limits. Should the Council’s current bank, Bank of Scotland, be rated less than BBB+, investments with them will be restricted to overnight deposits. • Banks (Secured). These are covered bonds, reverse purchase agreements and other collateralised arrangements with banks and building societies. These investments are secured on the bank’s assets, which limits the potential losses in the unlikely event of insolvency, and means they are exempt from bail-in. • Money Market Funds (MMFs). MMFs are pooled funds that invest in short- term debt instruments. They provide the benefits of a pooled investment, as investors can participate in a more widely diversified portfolio than they could do individually. Due to the high level of expertise of the fund managers and the very large amounts of money invested in MMFs, and the fact that the weighted average maturity (WAM) cannot exceed 60 days, MMFs offer a combination of high security, instant access to funds, high diversification, very low or no volatility and competitive rates of return. Item 5. Page 57
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APPENDIX 1 • Securities Issued or Guaranteed by Governments a) Treasury Bills. These are short-term bills (up to 12 months) issued by the Government and therefore are backed by the sovereign rating of the UK. An advantage compared to a time deposit in the DMO is that they can be sold if there is a need to access cash at any point in time. However there is a spread between purchase and sale prices so early sales may incur a net cost which would result in a fall in the nominal value of the instrument. b) Gilts. These are longer term debt issuance by the UK Government and are backed by the sovereign rating of the UK. • Lending to other Local Authorities. Lending to other local authorities will normally be in the form of fixed term deposits for periods up to one year. 4.3 All investments in the table at 4.4 are subject to the following risks:- 1. Credit and Counter-Party Risk: this is the risk of failure by a counterparty (bank or building society) to meet its contractual obligations to the Council, particularly as a result of the counterparty’s diminished creditworthiness, and the resulting detrimental effect on the Council’s capital or current (revenue) resources. There are no counterparties where this risk is zero although AAA rated organisations have a very high level of creditworthiness. Credit ratings are obtained and monitored by the Council’s treasury advisers, who notify changes in ratings as they occur. 2. Liquidity Risk: this is the risk that cash will not be available when it is needed. While it could be said that all counterparties are subject to at least a very small level of liquidity risk as credit risk can never be zero, in this strategy liquidity risk has been treated as whether or not instant access to cash can be obtained from each form of investment instrument. However while some forms of investment, e.g. gilts or corporate bonds, can usually be sold immediately if the need arises, there are two caveats: (a) cash may not be available until a settlement date up to three days after the sale and (b) there is an implied assumption that markets will not freeze up and so the instrument in question will find a ready buyer. The column in the table below at section 4.4 headed as ‘market risk’ shows each investment instrument as being instant access; sale T+1 = transaction date plus one business day before you get the cash, or term i.e. money is locked in until an agreed maturity date. 3. Market Risk: this is the risk that, through adverse market fluctuations in the value of the principal sums an organisation borrows and invests, its stated treasury management policies and objectives are compromised, against which effects it has failed to protect itself adequately. 4. Interest Rate Risk: this is the risk that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the Council’s finances, against which the Council has failed to protect itself adequately. The Council has set Item 5. Page 58
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APPENDIX 1 limits for its fixed and variable rate exposure in its previously agreed Treasury Indicators. 5. Legal and Regulatory Risk: this is the risk that the Council or an organisation with which it is dealing in its treasury management activities, fails to act in accordance with its legal powers or regulatory requirements, and that the Council suffers losses accordingly. 6. Bail-In Risk: this is the risk, arising from the EU Bank Recovery and Resolution Directive which has been implemented in the UK, that a bank’s creditors and depositors are forced to bear some of the burden of rescuing a failing bank. 4.4 The following table provides details of the proposed investment limits and maturity periods for Permitted Investments: *The only investment of this type used is a Call Account with the Council’s own Bank. 4.5 Controls on Treasury Risks 1. Credit and Counter-Party Risk: the Council has set minimum credit criteria to determine which counterparties are of high creditworthiness to enable investments to be made safely. Minimum Credit Criteria (Fitch or Equivalent) Liquidity risk Market risk Bail-In Risk Maximum Value of investments Maximum maturity period Debt Management Office n/a term no n/a No Limit 6 months Term Deposits: Local Authorities n/a term no n/a £5m 364 Days Banks (Unsecured) Long-Term: BBB+ Instant* no yes £5m (£10m Council’s own Bank) n/a Banks (Secured) Long-Term: BBB+ term no no £5m (£10m Council’s own Bank) 3 months Money Market Funds AAAmmf instant no n/a 0.5% of Money Market Fund size Government Money Market Funds – 2% of Fund size n/a Treasury Bills UK Sovereign Rating Sale T+1 No (If held to maturity) n/a No Limit 12 months UK Government Gilts UK Sovereign Rating Sale T+1 No (If held to maturity) n/a No Limit 12 months Item 5. Page 59
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APPENDIX 1 2. Liquidity Risk: the Council has cash flow forecasting models to enable it to determine how long investments can be made for and how much can be invested. 3. Market Risk: the Council does not directly purchase and/or account for investment instruments which are subject to market risk in terms of fluctuation in their value. If this position changes, instruments exposed to market risk will initially be purchased and held with the intention to hold them until maturity, thus mitigating market risk. 4. Interest Rate Risk: the Council manages this risk by having a view of the future course of interest rates and then formulating a treasury management strategy accordingly which aims to maximise investment earnings consistent with minimising risk or alternatively, seeks to minimise expenditure on interest costs on borrowing. 5. Legal and Regulatory Risk: the Council will not undertake any form of investing until it has ensured that it has all necessary powers and also complied with all regulations. 6. Bail-In Risk: The Council will diversify investments to manage this risk. Any investments subject to the risk of bail-in are restricted to overnight deposits with the Council’s own Bank (Call Account). 4.6 Unlimited Investments 4.6.1 The Regulations state that the Council can deem an investment as being ‘unlimited’ in terms of the maximum amount of the total portfolio that can be put into that type of investment but an explanation must be given for using that category. 4.6.2 The Council has only given the UK Government (Debt Management Office, Treasury Bills and Gilts) an unlimited category. This is considered to be the lowest risk form of investment available to local authorities. 5. Non Treasury Investments 5.1 Investments defined in the regulations include the acquisition of properties, share or loan capital. These types of investments may have originally been made for service or policy reasons or for treasury management purposes. Should the Council make an investment which is not listed as a permitted investment, that investment will not be made in accordance with the Consent of Ministers and as such will be ultra vires. The exception to this is where the Council makes a financial transaction that relies on separate legislative powers such as loans to third parties. 5.2 General powers to borrow and lend money are conferred by s165 of the Local Government etc (Scotland) Act 1994 and ensuing regulations. Specific regulations for loans to third parties by local authorities are contained in the Housing (Scotland) Act 1987, the Housing (Scotland) Act 2006 and the general power to advance well- being contained in the Local Government in Scotland Act 2003 at section 20. The inclusion of loans to third parties as part of the investments of the Council is to Item 5. Page 60
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APPENDIX 1 identify the value of local authority monies utilised in this way, monies which would otherwise be available for general investment and give rise to investment income. 5.3 The following table provides a summary of the Councils Non-Treasury Investments at 31 March 2024 and the maximum value of investments that the Council will hold. Actual Value at 31 March 2024 £m Max Value of Investments £m Investment Property * - Council £0.395m £10m Share Holdings - Council Note ** £0.1m Loans to 3rd Parties Market Rate - Council £0.402m £2.0m Loans to 3rd parties – Below Market Rate - Council £0.018m £0.5m Investment Property * - Common Good Funds £2.621m £12m Share Holdings - Common Good Funds Nil Nil Loans to 3rd Parties Market Rate – Common Good Funds Nil £0.5m Loans to 3rd parties – Below Market Rate – Common Good Funds Nil Nil Investment Property * - Trust Funds £0.100m £1.0m Share/ Unit Trust Holdings – Trust Funds £3.159m £3.5m Notes * Investment Properties have been categorised using IFRS guidelines and is mainly land which the Council will use for development in the future. ** Although the Council has 20.44% of total share capital in The Grampian Venture Capital Fund Limited no value has been attached this share holding in its current Balance Sheet due to the fact that the Council has no exposure to commercial risk and the Council has not passed on control of any of its assets. 6. End of Year Investment Report 6.1 At the end of the financial year, the Council will report on its investment activity as part of its Annual Treasury Management Report. Item 5. Page 61
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APPENDIX 2 THE MORAY COUNCIL APPROVED COUNTERPARTIES LIST UK Banks Limit (£m) Time Limit Long Term Rating See Note Bank of Scotland (Lloyds) 10 Call AA-/A1/A+ Barclays Bank 5 35 days A+/A1/A+ HSBC 5 35 days AA-/A1/A+ Lloyds Bank 5 35 days AA-/A1/A+ National Westminster Bank (RBS) 5 35 days A+/A1/A+ Royal Bank of Scotland 5 35 days A+/A1/A+ Santander (UK) 5 35 days A+/A1/A Standard Chartered Bank 5 35 days A+/A1/A+ UK Building Societies Nationwide 5 35 days A+/A1/A+ Other Institutions Debt Management Office Unlimited 6 Months AA-u/Aa3/AAu UK Local Authorities 5 2 years Money Market Funds Standard Life Sterling Liquidity Fund 5 Call AAAmmf/Aaa-mf/ AAAm Federated Sterling Prime Fund 5 Call AAAmmf/Aaa-mf/ AAAm Blackrock Institutional Sterling Liquidity Fund 5 Call AAAmmf/Aaa-mf/ AAAm Insight Sterling Liquidity Fund 5 Call AAAmmf/Aaa-mf/ AAAm Deutsche Bank Managed Sterling Fund 5 Call AAAmmf/Aaa-mf/ AAAm CCLA Public Sector Deposit Fund (UK) 5 Call AAAmmf/Aaa-mf/- Notes 1.The long term ratings for each institution above are in the format Fitch/ Moodys/ Standard & Poor. The minimum ratings are as follows: - Fitch: BBB+ Moodys: Baa1 Standard & Poor: BBB+ Item 5. Page 63
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APPENDIX 3 Prudential and Treasury Indicators Capital Expenditure Indicators 1. Capital Expenditure The Council is required to establish and keep under review capital investment plans which are affordable. It should make reasonable estimates of total capital expenditure that it plans to incur during the forthcoming year and the following two years. This indicator outlines capital spending plans for 2025/26, 2026/27 and 2027/28 based on the approved three-year capital plan. For comparison purposes, the actual spend for 2023/24 is presented together with estimates for 2024/25 based on the latest figures at 31 December 2024. 2023/24 Actual £000 2024/25 Estimate £000 2025/26 Budget £000 2026/27 Budget £000 2027/28 Budget £000 Capital Expenditure General Services 30,429 30,384 64,045 73,598 74,821 HRA 5,882 30,035 37,767 17,878 19,088 Total Capital Expenditure 36,311 60,419 101,812 91,476 93,903 Financed by: Capital Receipts 1,687 155 100 100 100 Capital Grants 18,956 23,152 54,443 30,939 22,027 Revenue 119 1,305 3,550 3,293 2,551 Total Funding 20,762 24,612 58,0993 37,332 29,205 Net financing need for the year 15,549 35,807 43,719 54,144 64,704 In General Services, the 2024/25 estimated capital expenditure includes a number of major projects. The most significant items are; £6.0m for the Moray Growth Deal, £4.3m on Road Improvement projects, £4.0m on the Learning Estate, £4.0m on vehicle and plant replacement and £3.1m on Waste Management Projects which includes the Council’s final share of cost of the contrustion for the NESS Energy for Waste (EfW) facility in Aberdeen. The increase on the HRA from 2024/25 relates principally to the phasing of the new build housing programme, along with an increase in investment in existing Housing Stock. Capital grant and other contributions show an increase of £31.3m from 2023/24 estimated amounts to the 2024/25 budget, explained mainly by an increase in grants to fund HRA new builds and government grant funding for both Moray Growth Deal and Levelling Up Fund. Capital expenditure includes two projects to be funded from Item 5. Page 65
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the Learning Eastate Improvement Programme (LEIP). LEIP funding is revenue and consequently is not reflected in the funding figures above. 2. Capital Financing Requirement The capital financing requirement measures the Council’s underlying need to borrow for capital investment. The capital financing requirement rises over the period as a large proportion of the Council’s capital expenditure is financed by additional borrowing thus increasing the Council’s total outstanding debt. The Council pays off an element of the accumulated debt each year through a revenue charge (the scheduled debt amortisation). 2023/24 Actual £000 2024/25 Estimate £000 2025/26 Estimate £000 2026/27 Estimate £000 2027/28 Estimate £000 Capital Financing Requirement (CFR) General Services 294,365 299,731 308,363 341,288 382,899 HRA 76,228 94,395 115,472 121,469 128,362 Total CFR 370,592 394,126 423,935 462,757 511,261 Movement in CFR 2,113 23,533 29,809 38,822 48,504 Net financing Need (Indicator 1) 15,549 35,807 43,719 54,144 64,704 Scheduled debt amortisation (13,426) (12,274) (13,910) (15,322) (16,200) Movement in CFR 2,113 23,533 29,809 38,822 48,504 Affordability Indicators The following three indicators measure whether the Council’s level of borrowing is affordable and financially prudent. 3. Ratio of Financing Costs to Net Revenue Stream This indicator provides a measure of the percentage of the budget that is being set aside to pay debt financing costs. For General Services this is the ratio of financing costs of borrowing against net expenditure financed by government grant and local taxpayers. For Housing, the indicator is the ratio of financing costs to gross house rental income. As part of General Services capital monitoring, this indicator is regularly updated to give prevalence to the affordability of the capital plan. This indicator is currently set at 10% for General Services and 35% for Housing. Item 5. Page 66
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Service 2023/24 Actual 2024/25 Estimate 2025/26 Estimate 2026/27 Estimate 2027/28 Estimate General Services 8.23% 9.22% 8.90% 9.30% 9.79% HRA 23.46% 27.71% 29.72% 34.12% 33.72% The percentages in General Services from 2023/24 to 2027/28 reflect the ongoing general requirement to increase borrowing to fund capital expenditure in the capital plan, particularly in the Learning Estate and Moray Growth Deal. The Growth Deal expenditure is front-loaded against the anticipated grant profile and the Council has made provision for this. The decrease from 2024/25 to 2025/26 represents the repayment of the loans pool holiday taken in 2022/23 which had higher repayments in 2023/24 and 2024/25 before starting to taper off. The increase in percentages in the HRA from 2023/24 to 2027/28 reflects the ongoing requirement to increase borrowing due to the ongoing programme of new build housing and an increase in investment in existing housing stock. This is reflected in the latest HRA business plan. 4. Estimates of Incremental Impact of New Capital Investment Decisions on Council Tax and House Rents This indicator demonstrates the incremental impact of planned capital expenditure and associated borrowing on council tax and rent levels, were these to rise to cover the cost of capital. 2023/24 Actual 2024/25 Estimate 2025/26 Estimate 2026/27 Estimate 2027/28 Estimate Council Tax - Band D £54.46 £128.37 £0.85 £41.28 £60.95 Average Weekly Housing Rents £2.70 £4.67 £3.85 £6.18 £1.55 An increase in the calculated amount on Council Tax is indicative of the Council’s requirement to borrow in order to fund the General Services Capital Plan. The 2024/25 estimate reflects the inclusion of high cost projects of Investment in the School Estate and the Moray Growth Deal and also the increase in interest rates. In the HRA, the increase in incremental impact on housing rents from 2023/24 onwards demonstrates that the capital investment plans, including for new affordable housing, require an incremental increase on average rents to fund the cost of additional borrowing, hence the incremental impact of additional borrowing decreases over time. Item 5. Page 67
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Prudence Indicators 5. Gross Debt and the Capital Financing Requirement This indicator records the extent that gross debt is less than the capital financing requirement (see Indicator 2 above). This indicator shows prudence by demonstrating that over the medium term external borrowing is used only for a capital purpose. The values are measured at the end of each financial year. Debt is the sum of external borrowing and other liabilities relating to the financing of assets (e.g. PPP and other finance leases). Reported debt must include all liabilities relating to the financing of assets. 2023/24 Actual £000 2024/25 Estimate £000 2025/26 Estimate £000 2027/28 Estimate £000 2027/28 Estimate £000 Borrowing 259,641 283,729 314,134 352,310 402,787 Other Liabilities 49,493 48,938 48,342 45,638 47,015 Gross Debt 309,134 322,667 362,476 397,948 449,802 CFR 370,593 394,123 432,935 475,399 511,261 Under Limit By 61,459 61,459 61,459 77,451 61,459 The above figures confirm that the Council’s borrowing will be under the Capital Financing Requirement. External Debt Indicators The prudential indicator for actual external debt is considered at a single point in time, which is at the end of each financial year. Therefore, it is only comparable to the authorised limit and operational boundary at that specific time. The actual external debt reported in the annual accounts for the previous year is required to be shown in the tables below for comparison purposes only. 6. The Authorised Limit For External Debt The authorised limit for external debt is required by the Prudential Code to separately identify external borrowing and other liabilities such as PPP and finance lease obligations. This limit provides a maximum figure to which the Council could borrow at any given point during each financial year. The authorised limit should contain sufficient headroom to provide for any anticipated payments as well as being based on the Council’s capital investment plan. Item 5. Page 68
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The authorised limits shown above are based on the proposed capital investment plan for 2024/25 to 2027/28 and anticipated Other Liabilities and take account of Treasury Management policy and practice. The figures allow sufficient headroom for unanticipated cash movements. Total debt must include all liabilities relating to the financing of assets. 7. Operational Boundary for External Debt This indicator is a management tool for in-year monitoring and is lower than the Authorised Limit as it is based on an estimate of the most likely level of external borrowing at any point during each year. Operational Boundary 2022/23 Actual Maximum £000 2023/24 Estimate Maximum £000 2024/25 Estimate Maximum £000 2025/26 Estimate Maximum £000 2026/27 Estimate Maximum £000 Borrowing 266,978 314,828 376,240 425,427 484,144 Other Liabilities 49,493 49,938 49,342 48,703 48,015 Total External Debt 316,471 364,766 425,582 474,130 532,159 8. Liability Benchmark The liability benchmark was introduced as a new treasury management prudential indicator in the 2021 edition of the CIPFA Treasury Management Code. Unlike other indicators, the liability benchmark is to be shown graphically and consists of three lines – the loans capital financing requirement, the net loans requirement and the liability benchmark itself, with also an area for actual borrowing: • The Loans Capital Financing Requirement (LCFR) is the total Capital Financing Requirement (CFR) less the amounts that are met by other long- term liabilities, such as lease liabilities. The Council does not need to borrow for these amounts as the liability is effectively providing the cash to fund that part of the CFR. • The Net Loans Requirement (NLR) is the amount of borrowing needed to keep treasury investments at zero. It is almost lower than the LCFR due to the balance sheet resources that create cash. 2023/24 Actual Maximum £000 2024/25 Estimate Maximum £000 2025/26 Estimate Maximum £000 2026/27 Estimate Maximum £000 2027/28 Estimate Maximum £000 Borrowing 266,978 319,828 391,240 440,427 499,144 Other Liabilities 49,496 50,938 50,342 49,703 49,015 Total External Debt 316,471 370,766 441,582 490,130 548,159 Item 5. Page 69
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The LCFR can be described as the maximum permitted level of borrowing. The NLR is the minimum possible if borrowing, at which investments would be zero. This would expose the authority to the liquidity risk of being unable to make payments when due. The liability benchmark is the point between the two, where an appropriate balance of risks can be struck between these two extremes. 8. Compliance with CIPFA Code of Practice for Treasury Management in the Public Services This is an adoption statement aimed at ensuring that treasury management is led by a clear and integrated forward treasury management strategy and recognition of the council’s existing borrowing and investments portfolio. There are four treasury prudential indicators, the purpose of which is to contain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of an adverse movement in interest rates. However if these are set to be restrictive they will impair the opportunities the Council may have to reduce financing costs. 8.1 Fixed and Variable Rate Limits Upper limits on variable rate exposure – this indicator identifies a maximum limit for variable interest rates based upon the debt position net of investments. Item 5. Page 70
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Upper limits on fixed interest rate exposure – similar to the previous indicator, this sets a maximum limit on fixed interest rates. 2022/23 Actual 2023/24 Estimate 2024/25 2025/26 & 2026/27 Interest Rate Exposures Upper Limit Upper Limit Upper Limit Upper Limit Limits on Fixed Interest Rates based on Net Debt 100% 100% 100% 100% Limits on Variable Interest Rates based on Net Debt 0% 35% 35% 35% 8.2 Maturity Structure of Fixed Interest Rate Borrowing Maturity structure of borrowing – these gross limits, both lower and upper, are set to reduce the Council’s exposure to large fixed rate sums falling due to be refinanced within the same financial year. 2022/23 Actual 2023/24 2024/25 2025/26 & 2026/27 Lower Upper Lower Upper Lower Upper < 12 months 36.44% 0% 37% 0% 40% 0% 37% 12 – 24 months 2.97% 0% 20% 0% 20% 0% 20% 2 – 5 years 10.77% 0% 25% 0% 25% 0% 25% 5 – 10 years 8.40% 0% 50% 0% 50% 0% 50% >10 years 41.43% 0% 85% 0% 85% 0% 85% 8.3 Maximum Principal Sums Invested Greater than 364 days Following changes arising from the Investment Regulations applicable from 1 April 2010, the Council can invest for periods longer than 364 days .The Council does not currently take advantage of this change and therefore has set a limit of Nil for investing over 364 days. 2022/23 Actual 2023/24 2024/25 2025/26 & 2026/27 Principal Sums Invested > 364 days £0M £0M £0M £0M Item 5. Page 71
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APPENDIX 4 INTEREST RATE FORECAST Current % Mar 25 % Jun 25 % Sep 25 % Dec 25 % Mar 26 % Jun 26 % Sep 26 % Dec 26 % Mar 27 % Jun 27 % Sep 27 % Dec 27 % Bank Rate 4.50 4.50 4.25 4.00 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3-mth Money Market 4.90 4.60 4.35 4.10 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 5-yr Gilt Yield 4.15 4.20 4.20 4.10 4.00 3.90 3.90 3.95 4.00 4.05 4.10 4.10 4.10 10-yr Gilt Yield 4.46 4.50 4.45 4.30 4.25 4.25 4.25 4.25 4.30 4.35 4.35 4.35 4.35 20-yr Gilt Yield 4.98 5.00 4.90 4.80 4.70 4.70 4.70 4.70 4.70 4.70 4.70 4.70 4.70 50-yr Gilt Yield 4.34 4.70 4.60 4.60 4.50 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40 The forecast is based on the following underlying assumptions: • The Bank of England’s Monetary Policy Committee (MPC) reduced the Bank Rate to 4.50% on 6 February 2025, with the next meeting of the MPC due on 20 March 2025. The authority’s treasury adviser Arlingclose is forecasting that the MPC will reduce the Bank rate in gradual manner and that they see a further rate cut in May 2025. • Consumer Price Index (CPI) inflation rates are forecast to rise above 3% in the near term due to unfavourable base effects, particularly for retail energy prices. The MPC revised its inflation forecast upwards significantly, with the CPI Rate now expected to peak at 3.7% in mid 2025. • The MPC has emphasised that monetary policy will be eased gradually and carefully. This may place a greater emphasis on the balance between growth and inflation, a shift away from the focus on current and near-term inflation of recent years. • Private sector wage growth and services inflation remain elevated despite a reduction in the services CPI rate for December. Arlingclose expect the labour market to continue to weaken over the next year, which will place downward pressure on wage growth and services inflation. • US (and UK) government bond yields have fallen back from January peaks, largely because the new US administration has yet to implement significant inflationary policies. US data has also been a little more mixed, suggesting slower growth rates in the quarters ahead. The correlation between UK and US yields remains high, so volatility in UK gilt yields will continue to be strongly influenced by US events. Item 5. Page 73
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APPENDIX 5 TREASURY MANAGEMENT POLICY STATEMENT 1. Moray Council defines its treasury management activities as the management of the authority’s borrowing, investments and cash flows, including its banking, money market and capital market transactions, the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks. 2. Moray Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the authority and any financial instruments entered into to manage these risks. 3. Moray Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving value for money in treasury management, and to employing suitable, comprehensive performance measurement techniques within the context of effective risk management. Item 5. Page 75
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APPENDIX 5 GLOSSARY OF TERMS Bail-In: an arrangement in which creditors of a failing financial institution are required to cancel come of its debts as part of a plan to save it from collapse Financial Instruments: are assets that can be traded, or they can also be seen as packages of capital that can be traded Gilts: fixed-Interest loan securities (Bonds) issued by the UK Government Gilt Yield: the interest raids paid on UK Government Bonds Money Market Fund: a mutual fund that invests in highly liquid, near-term instruments Safe Haven: a type of investment that is expected to retain or increase in value during times of market turbulence, for example: gold or defensive stocks Item 5. Page 77
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