Funds meltdown hits council

By NEIL RIDDELL

SHETLAND Islands Council is unlikely to be able to sanction the building of any major new projects for a number of years as a result of the global financial crisis which has seen more than £60m wiped off the value of its oil funds in the past eight months.

SIC convener Sandy Cluness admitted this week that big projects like new care homes and the Bressay tunnel will have to be put on hold indefinitely as the latest figures showed the value of the council’s reserves had tumbled by £27m and the charitable trust’s investments have slipped by £35m since the beginning of April (as shown in the graph above).

As of 14th November the council’s reserves were valued at £220m, well below the SIC’s agreed policy of maintaining those reserves at or above £250m at the end of each financial year, though head of finance Graham Johnston pointed out that the current market value of external investments was not the measure used to determine the policy.

Mr Johnston, who is setting out a detailed report to go before the Full Council on Wed­nesday, is of the opinion that nothing pre-emptive should be done until the balance sheet position is calculated on 31st March next year and, though he conceded that “circumstances may well require a reconsideration”, his warning to councillors remains stark: “We do not believe it would be prudent and wise to go below that floor.”

But with financial analysts predicting the current downturn will continue well into next year and perhaps beyond, it appears increas­ingly likely that the £250m policy will be broken next spring and Mr Cluness has not ruled out the idea of revising the floor level of the reserves. “We may have to review that, or we may keep it as it is. That’s a decision we have to take,” he said.

Mr Cluness believes the council has enough money to carry through the projects – cinema and music venue Mareel and the Mid Yell Junior High School – to which it is already committed, along with asking Shetland Charitable Trust to pay for the new Anderson High School before leasing it back to the council.

That would mean the SIC either paying the money back through its revenue fund – which could mean cuts in education or elsewhere to the already over-stretched annual budget – or asking the Scottish government to pay it back.

But as councillors seek to wade through an exhaustive wish list of capital projects to identify their priorities, Mr Cluness admitted it was extremely unlikely that more large-scale projects would be pursued in the foreseeable future. With reference to the £44 million project for a tunnel to Bressay, he said: “Those kind of big projects, in addition to what we’ve got, would be very difficult to do at the present time, but there’s no reason we can’t think of these things in the long term.”

There appears to be growing disquiet over the heavily oversubscribed capital programme, with councillors seemingly at odds over the best way of agreeing their priorities for the long wish list of building projects – of which only a fraction are likely to see the light of day in the next five years and perhaps longer.

That led to a fractious debate at last week’s services committee at which some councillors attempted to push their pet projects higher up the priorities list (see separate story).

The infrastructure committee’s list alone amounts to projects costing £168m between now and April 2014, a five-year period in which the council’s total capital budget will be £80m. A number of major transport projects are supposed to be in the pipeline, including the Bressay tunnel.

SIC chief executive Morgan Goodlad has been tasked with working through infrastructure’s list in order to “review these proposals and rank these projects in a realistic order within the funds likely to be available”, in his own words.

ZetTrans chairman Allan Wishart, who also chairs the infrastructure committee, said he was still “hopeful” over the Bressay project and stressed the importance of pursuing external funds where possible. But he also voiced deep concern over the state of the community’s financial reserves and said he fears councillor-trustees will one day wake up and realise all the oil money has gone.

“My fear is that we end up with no money, no assets, nothing to show for it,” he said. “We’re spending too much on running costs, revenue funding, we have to keep striving to put in place assets and infrastructure that’s going to serve generations in the future. That’s why I’m firmly in favour of pursuing the Viking Energy project until we know, one way or another, whether it will help sustain the finances that are so important for this community.”

Mr Wishart said he would be opposed to any move to lower the floor at which the council seeks to maintain its reserves. “I just think we have the possibility of, as the Yorkshire people say, going from clogs to clogs in three generations – that worries me immensely. I don’t think the Shetland public would stand for that, digging into the reserves to leave neither money nor assets.

“The trustees – and the councillors – really do have to wake up and look at the reality of it; [that means] looking at efficiencies within the council and the trust, and it’s going to have to look at things that we can possibly take out of the running costs, without – as far as possible – affecting the service on the frontline too much.”

He also pointed out that the council and charitable trust now have many properties and assets in need of repairs and maintenance, many of which are upgrades they are compelled to carry out in order to comply with legislation on health and safety.

Mr Johnston’s existing strategy budgets for capital spending of £20m in the next financial year, followed by £15m a year thereafter, but much of that is likely to be swallowed up by the cost of maintaining existing buildings and plants. Mr Wishart added: “We have to look after what we’ve got before we put any new things on the list.”

There is also a proposed tunnel under the Bluemull Sound between Yell and Unst, along with the costly – but necessary – replacement of Whalsay’s ferry terminal and the council’s £2.2m contribution for a breakwater in Fetlar.

Other major projects on the wish list include: replacements for the Leog, Eric Gray, Laburnum, Viewforth and Islehavn centres; identifying new care home places; an extension to Shetland College, redeveloping Lerwick Library; an occupational therapy resource centre; additional classrooms for Sandwick Junior High and Happyhansel Primary School and a new halls of residence for the AHS.

Writing in this week’s Shetland Times, Lerwick South councillor Jonathan Wills again lamented the lack of leadership at the top of the council and called for an urgent review of how much the SIC can afford to spend in the next four years, on the back of a report from Audit Scotland which shows a funding gap of some £37m – discounting the new AHS – for its capital programme in the next two years alone.

He believes sums suggest the capital programme will need to be cut by some 60 per cent and wants to see expert advice feeding into a list which identifies statutory duties and essential maintenance costs, along with a list of projects the council would “want” and “like” to build in the future, before deleting everything else from the wish list.

“It’s about time the council leadership levelled with the people,” he writes. “Where’s the money to come from for a Bressay tunnel or, even more fantastical, a Bluemull Sound tunnel? They have no idea. Neither can happen in the foreseeable future.”

Mr Cluness admitted that the downturn in the stock market in the past 12 months meant the SIC would have to be “more careful” about how it spends the reserves, but also remained hopeful that something could be done to generate more houses in Lerwick, a pressing concern with waiting lists hovering around the 1,000 mark.

There is a limit to the amount of work the local building trade can cope with and Mr Cluness said that depending on the trade’s capacity it may be necessary to look outwith Shetland to enable the proposed project to build hundreds of new council and private homes on the Staney Hill to go ahead.

“We want to keep the local contractors going first, but the lack of housing is a very serious disadvantage to this community,” he said.

“If we simply took the view that our reserves were never going to get any better, or if we had none at all, we wouldn’t build anything,” Mr Cluness continued. “We’re the only local authority that has these reserves; what we’re discussing is whether we use our own money or not. That’s a decision for us, but I’m sure we will be very careful.

“Where we have made commitments, we have to honour them and we’ll find the money to do these things. Overall, this particular council has looked after these reserves for 30 years, building them up from a value of about £25m. I think this council has a very good record with the way it uses its reserves. But we have to be very careful what we spend, and be cautious until there are some signs of recovery, certainly.”

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THE COUNCIL workers’ pension fund has also been hit badly by the downturn and now sits at £149m having lost £44m in value in the last eight months.

Members agreed last month to end Capital International’s mandate as fund managers and transfer the bulk of the fund to Barclay Global Investors, which head of finance Graham Johnston hopes will offer a better market performance as it uses a market tracking system to keep up with the latest trends.

The decline means the total value of the SIC’s reserves, the charitable trust’s investments and the pension fund has gone down by £105m since April.

Including the £10m withdrawn from council reserves to pay for capital and revenue spending in the current financial year and the £9m the charitable trust has taken to take care of its annual spending commitments, the combined total of the three funds has declined from £644m to £519m.

Meanwhile, Mr Johnston believes councillors are “on course” to wean the SIC off u­sing the oil funds to supplement the block grant it receives from the Scottish government to pay for service provision.

Along with reducing capital spending from £20m to £15m a year as of 2010-11, their policy is to reduce the amount taken from the reserves to support spending on services on a gradual basis over the next five years – with a draw of £5m last year expected to fall to £4m this year as savings continue to be identified.

“They’ve hit their targets or bettered them every year so far and I expect them to continue with that policy unless they choose to change it. It’s a policy that’s working,” Mr Johnston said.

Trustees of the charitable trust, mean­while, were told at a recent meeting they would have to find savings to bring their £12.8m annual budget down to a sustainable level of £11m a year, with independent trustee John Scott voicing disquiet at the level of inaction on identifying areas where cuts can be made.

Acting general manager Jeff Goddard said this week that the market downturn in recent months was of grave concern because if the stock market was only to make a partial recovery, trustees would have to be asked to cut their spending much further at some point in the future.

“There must be concern that if the market doesn’t recover, further cuts would be needed,” he said. “The need to save £1m a year is based on the market going up [quite a bit] on average each year; we’ve got to go back up quite a lot of the way to get back to where we started. With the caveat of saying who knows what might happen [in the markets], it doesn’t look likely that we’re going to be back up within the next two years.”

There are those who argue that the £11m budget level is too high regardless and that a more sensible level would be around £9m a year. But that would require some swingeing cuts to the trust’s spending on care homes, the Christmas bonus scheme for pensioners and the disabled and the work of Shetland Arts, the recreational trust and the amenity trust. Neil Riddell