Warnings about council cash running out failed to fully consider investments

Shetland Central member Ian Scott asked whether members had been told the complete picture when it came to council finances.

Auditors are to take a fresh look at council finances after it emerged previous gloomy assessments failed to fully consider investment income.

Audit Scotland’s Brian Howarth said the SIC’s previous projections “overrated” expenditure – and his team would seek to a “more balance” view.

Councillors have faced repeated warnings over recent years that their use of reserves was “unsustainable” and they risked running out of cash.

The Accounts Commission issued an “urgent wake-up call” last year – criticising members for their failure to address a forecast funding gap of up to £142m.

The bleak assessments were based on the council’s own medium-term financial outlook for 2022-27, which forecast a possible “worst case scenario” deficit of £158m.

However, Mr Howarth’s latest analysis found the former forecasts were overly focussed on expenditure and did not give enough consideration to investment income.

He told today’s ( Tuesday) audit committee that finance manager Paul Fraser had already asked his team to take a fresh look at the financial projections.

Such an approach,Mr Howarth said, would consider the income from investments and harbour board and how it contributed to service delivery.

“There’s more work to be done on that and I hope we can work together with Mr Fraser to get a clearer picture than has been painted in the past,” he said.

Mr Howarth’s comments were made following questions from Shetland Central member Ian Scott, who has raised frequent doubts about the validity of previous assessments -often clashing with fellow councillors and officials in chamber debates.

Mr Scott said previous auditors over the years had told members “we are running short of money” and asked Mr Howarth if that was the “complete picture”.

He said the former assessments only considered “one side of the ledger – the debit side”.

Mr Scott questioned such an approach, given that the council has only experienced one year “since the great crash of 2008” when its reserves had not increased.

He noted that in some years the reserves had increased by almost £100m.

Mr Scott suggested Mr Howarth had taken a “slightly more progressive view ” of the investments.

While less pessimistic than previous auditors, Mr Howarth did note that last year was the first in recent history when the useable reserves had decreased.

He said a decline in investment returns had played a significant role in that.

Other key findings in the audit focussed on a £10m underspend on capital projects.

Mr Howarth said a review was under way to investigate whether the council’s capital planning was “overly optimistic”

He noted a £2m underspent had largely been driven unfilled vacancies.

Like many other councils, Mr Howarth acknowledged “significant budget gaps” in the years ahead.

Committee chairman Allison Duncan said the overall report was “favourable” and welcomed the progress made on implementing last year’s recommendations.

“In this financial year the council finances are reasonably sound,” he said.

“For the next five years, the outlook doesn’t look promising, as we face unchartered waters.”

The Shetland South member noted various challenges ahead, including inflation, the possibility of a National Care Service, reduced Scottish government funding, a council tax freeze and uncertainty over funding for ferry services.

“Despite these forthcoming challenges and others this council remains financially sound and to remain sustainable we must not commit to overdraw on our reserves so that we are well placed to serve the Shetland community into the future,” he said.

“From a members’ perspective, over the same period, there are going to be difficult decisions to make which will not always be popular with the communities that we serve.”