Gray: squandering of oil money since 2000 caused SIC spending crisis

Shetland Islands Council would not be facing any school closures or cuts to its ferries budget if it hadn’t squandered tens of millions of pounds from its oil reserves since 2000.

That is the message in a stark report from finance chief James Gray outlining how the local authority came to be overspending to the tune of £30 million a year.

Members of the audit and scrutiny committee will hear on Thursday that some £325 million was drawn from reserves in the last 10 years. Their value has plummeted by 59 per cent since the turn of the century.

Councillors who took office one year ago have already ushered in huge cuts to deal with the spending crisis. Mr Gray’s report comes as the SIC prepares to embark on fresh consultations which could result in numerous school closures.

He states: “Had the council adhered to a policy of a sustainable draw on reserves since they peaked in 2000, it would mean that the council would have over £8 million per year more to spend each year on services in perpetuity. This could have meant that no savings would now be required from schools or ferries.”

While the report’s findings will come as little surprise to many, council sources say it is a damning indictment of key figures including ex-convener Sandy Cluness and Morgan Goodlad, who was chief executive from 2000 until he retired in May 2009.

The main factor causing spending to rocket was staff costs, which rose from £54 million to £93 million between 2003 and 2012. That was mostly a result of taking on more staff in education and social care.

Many islanders point to the many millions wasted on costly fiascos such as the Bressay Bridge (£7 million), Smyril Line (£4.2 million), a new Anderson High School (£5.5 million) and SSG Seafoods (£7 million).

But Mr Gray points out that those regrettable failures were not the main cause of the SIC’s monetary woes.

He writes: “The overwhelming reason that the council is in its current financial difficulty is because of overspending on day-to-day services which is a drain on the reserves year after year, rather than because of one-off expenditure items such as the Norröna or Bressay bridge projects, despite them being ill-fated.”

There did not appear to be any clear strategy in the aftermath of the 2008 global financial crisis, he suggests.

“The level of revenue spending in 2009-10 was 16.5 per cent higher than the previous year despite the onset of a global financial crisis that has been deeper and more protracted than the great depression of the 1930s,” Mr Gray writes.

That led to its spending deficit tripling in three years from £10.4 million in 2009 to £31.8 million last year. In that period, spending rose by 22 per cent while income increased by just three per cent.

Mr Gray suggests previous financial reporting had failed to “explicitly set out” the extent of the SIC’s reliance on its reserves – “masking the scale of the overspending that was developing”.

He lays out an eight-point plan designed to ensure such profligacy does not happen again. With the likelihood that there will be no real-terms increase in funding from the Scottish Government for the rest of this decade, he says it is important that the council recognises the importance of introducing new charges to plug the budget gap.

Oil industry income has averaged less than £3 million a year since 2003, and “it is anticipated that over the next three years the surpluses generated will be close to zero”. That may change once the new gas plant at Sullom Voe is up and running.

Financial scrutiny is being bolstered: Mr Gray says individual departments were traditionally asked to “identify their own cost pressures and have these included in the budget without appropriate independent scrutiny”. Finance officials will now examine each department’s case.

He notes that over £37 million was spent on the Yell Sound ferries project between 2003 and 2006.

Mr Gray highlights the importance of taking into account any new maintenance costs arising when councillors agree to embark on big capital projects.

Capital spending is liable to be much lower than it has been historically, and priority should be given “to those projects that result in revenue savings … over those that create a new ongoing cost pressure”.

He suggests the oil reserves’ fluctuating fortunes on the volatile stock market have “skewed” spending.

Mr Gray states: “When there has been a large return in the past, this has led to a view in certain quarters that it justifies a large level of spending from the reserves. However, the council has suffered years of large losses too.”

* See this week’s Shetland Times for councillors’ reaction to Mr Gray’s report.