Pressure on for council CFOs: Public Eye

Posted on August 30, 2009 · Posted in Public Eye

 

Financial pressures on local authorities have been acute in recent months – and show no sign of abating. Increased costs from fuel and food inflation, more children taken into care following the ‘Baby P case’ and higher recession-related spending have combined in a double whammy with reductions in investment income, planning fees, car parking charges and capital receipts.

 

Two-thirds of councils are helping more people with homelessness and housing problems. A quarter of authorities are facing greater demand for care for the elderly – possibly because family breakdowns increase as the recession bites. One in three London boroughs is educating more children as parents take their offspring out of private schools.

 

The crisis is so bad that three quarters of councils have had to revise their budgets for the current financial year. Budgetary planning for the new financial year has been made even more difficult.

 

According to research from the Local Government Association, council income is likely to fall across England alone by £2.5bn in 2009/10. Yet pressure from taxpayers and the threat of capping from central government has persuaded local authorities to increase council taxes by much less than their costs have typically risen. A poll from the LGA predicts an average council tax rise of 3.5% and government ministers indicated they would cap councils that attempted to increase taxes by anything approaching 5%.

 

While government grant is rising by 4.2% for 2009/10 – above the current rate of inflation – that will typically not enable councils to overcome the above-inflation costs of fuel over the last couple of years.

 

Councils are doing the obvious things. Almost a quarter adopted a recruitment freeze as the squeeze began to bite and one in seven began cutting jobs by the beginning of this calendar year. Those employment cuts increased rapidly as this year progressed, with thousands more posts going as the financial year closed. Some councils that lost large sums of money in Icelandic investments were noticeably making large job cuts.

 

But despite the level of stress placed on council finances, a report published at the end of last year by the Audit Commission showed local authorities to be in remarkably good shape. Most councils had predicted and planned for the loss of income and higher costs – which hit them to the tune of £2.5bn even before the new financial year, according to the Commission’s analysis.

 

“After all the doom laden headlines, I think facts like this help to inject a little realism,” says the Commission’s chief executive, Steve Bundred. “While councils are in the firing line and undoubtedly face some very tough choices in the longer-term, they should keep a sense of perspective. By and large councils knew this downturn was coming and have planned for it. The pressures are real, but councils are coping with them well.”

 

Yet despite the optimistic assessment overall, the Commission revealed that 5% of councils are not confident they can identify and implement the necessary cost-cutting actions successfully. The Commission’s report Crunch Time? detailed steps that councils are taking to deal with the crisis. In addition to recruitment and staffing cuts, service cuts are being planned – most commonly in leisure and culture, community and children’s services. This means less money, in particular, being spent on museums and galleries and sports development.

 

Councils have also stepped-up their efficiency programmes – including through reducing the amount of floorspace being used and adopting more efficient procurement processes. Most councils are also raiding reserves, which built-up substantially in recent years and now, across England, stand at 13% of revenue spending.

 

The Commission reminded councils that they need not only to make efficiency savings to meet agreed targets and finance new activities, but also to continue to deliver core programmes. Its report reminds authorities that budgetary planning needs to consider improving back office functions, maintaining performance improvement, maximising income and using competition more effectively in procurement.

 

Ian Roberts is assistant chief executive with responsibility for finance at St Helens Metropolitan Borough Council, which is praised by the Audit Commission as a best practice example for its financial planning. Roberts says that councils must always at a time of financial pressure bear in mind the short and long-term.

 

“You have begin by analysing all the key issues,” he says. “Get an idea about the size of the problem. Have an early warning system in place. Understand the reasons behind any spending variation. You need to be looking at the cause and the effect. You need to be looking to see if this has a short-term or long-term impact. That has an effect on your own response to the issue. If it is short-term there are different actions you can undertake.” One option might be a temporary recruitment freeze.

 

“Once you understand the reasons, then it comes down to an impact analysis,” continues Roberts. “Is this manageable within the division? If, for example, you are getting less in planning fees it is because of a fall in planning applications, so you could redeploy your workforce. If it is an organisational problem – for example, energy bills massively increasing – you have to decide how to control your budget.” Those cost increases might be met either out of the division’s own operating budget, or from across the authority.

 

Where a council has a short-term fall in income because of the recession – in car parks, for instance – this might be met from reserves, suggests Roberts. But where there is perhaps a £1m gap because fuel costs have shot-up, there needs to be a longer-term, more strategic response. If all practical fuel efficiency measures have already been adopted, this might mean the council has to review which are its core services, those on which it citizens most depend, and identify a non-core service for closure.

 

St Helens has coped with the financial pressures well, says Roberts. Divisions have absorbed higher costs for the most part, with some shortfalls met from earmarked short-term reserves. “The MTFS [medium term financial strategy] identified a general underlying level of reserves which might be required for these sort of situations,” explains Roberts. Beyond that “we looked for longer term solutions,” he says.

 

The authority concluded it could manage in the 2008/9 and 2009/10 years using short-term reserves to cover budget gaps, but that additional efficiency savings would be required from 2010/11. These will be achieved using earmarked efficiency reserves to finance ongoing cost savings. In this way, says Roberts, the authority’s budgets will be brought back on track. Even after spending £1m of reserves to cover short-term pressures, the authority is left with about £6.5m in reserves – sufficient, Roberts believes, for a medium-sized metropolitan authority with revenue spending of £140m a year.

 

But there are tensions between achieving long-term savings and incurring short-term costs. Councils may prefer to rationalise building stock and reduce floorspace – as advised by the Audit Commission – to cut maintenance and energy costs. But if this means vacating a property, the council may have to pay empty property business rates or sell when prices are weak. At present, says Roberts, St Helens’ preferred solution is to let properties on short term leases until the property market recovers.

 

Roberts is also wary of national politicians’ calls for local government to lead programmes of infrastructural spending to create employment and boost the construction sector using their retained reserves and balances. “This is not an issue of local government’s making,” he points out. “Yet we are being looked to for some of the answers by sacrificing our financial stability. This would have a significant impact on the financial planning of all local authorities.”

 

And there already more than enough impacts on councils’ financial planning for CFOs’ liking.