Rising to the challenge The evolution of local government 2015/16
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Rising to the challenge
The evolution of local government
Summary findings from our fourth year of financial health checks at English local authorities
December 2014
2013/14
2014/15
2015/16Contents Introduction 1 Rising to the challenge 4 Key indicators of financial performance 10 Strategic financial planning 13 Financial governance 16 Financial control 21 The NHS experience 25 Appendix A: tipping point scenarios 28 Appendix B: good practice checklist 30 About us 31 Contact us 32 Selected bibliography 33
Introduction
In the wake of the financial crisis and the government spending review, this report looks at
how local authorities have risen to the huge financial challenges they face. It also looks at
the steps they have taken to secure financial resilience and how they can meet the challenges
of the future. This is the fourth in our series of annual reports on financial resilience in local
government in England.
The era of austerity adult and children’s social care. There In ‘2016 tipping point?: Challenging
In 2008, the UK economy entered a has been some localisation of funding the current’ (2013), we reported that
period of sustained financial downturn decisions but there are other areas local government was continuing
as a result of the global financial crisis. where local government has less to deliver despite the challenges.
That led to a large and permanent control eg in local taxation and in However, there were some signs
reduction in the finances available to the increased activity of regulators of stress, particularly in delivering
fund public services. such as Ofsted and the Care Quality financial targets, although there was
In October 2010, the chancellor Commission (CQC), which can have some variation in the stresses affecting
announced a wide-ranging spending significant cost implications. authorities of different kinds and in
review of public services (SR10). This all means that the onus has different regions. We were also able
This aimed to bring the public been on local authorities to innovate to narrow down the risk of reaching
finances into balance by financial and improve efficiency wherever the tipping point and identified that
year 2014/15. The savings required to they can. it would only affect a minority of
deliver this objective reflect the largest authorities with 2016 emerging as the
reduction in public sector funding The response of local government crucial year for them.
since the great depression of the 1920s. Since our first report, ‘Surviving This report takes that analysis
For local government, this meant a the storm: how resilient are local forward, using information gathered
real-terms funding reduction of 28%, authorities?’ published in December from our work at local authorities
excluding schools. 2011, we have followed the progress during financial year 2013/14.
The government then announced of local authorities in their efforts
that this would not be sufficient to to manage this time of austerity. Evolution in financial management
balance the country’s finances by We concluded that authorities had The last four years have presented
2015. In 2013, a new spending review responded well to the initial challenge an unprecedented challenge to local
(SR13), covering the period to 2015/16, of SR10, but the real challenges lay authorities, but it is a challenge to
required a further 10% saving in local in the future. which many have risen. This report
government. The era of austerity Our next report, ‘Towards a tipping looks at how financial management
is likely to continue through point’ (2012), identified a series of arrangements have evolved over the
2017 and beyond. potential financial ‘tipping points’ that period; what still needs to be done;
The funding reductions over this many local authorities felt were on the what good arrangements look like;
period are compounded by rising horizon. We described a number of and what the future holds.
demand and, in some cases, rising tipping point scenarios.
unit costs for some services – notably
Rising to the challenge 1Our approach • Strategic financial planning Within each of these themes, we
Our core research is based on a detailed Does the authority have a robust identified a number of sub-categories
assessment of information from our financial plan? This theme focuses (outlined in Table 1) and gave each a
statutory Value for Money (VfM) on financial planning arrangements red/amber/green (RAG) risk-rating
audits at 133 local authorities, for the and the medium-term financial plan using the criteria provided in Table 2.
financial year ending 2013/14. This used (MTFP). This includes the plan’s The latter was based on a judgement
a combination of document review, scope; the key financial assumptions on the part of the reviewer against our
supplemented by interviews and a made; its relationship with wider VfM framework to provide consistency
supporting survey, which received strategic and service planning; and its across authorities.
108 responses. We also draw on our flexibility in changing circumstances. Generally, a red rating reflects a
research from the previous three significant and immediate risk to an
years as a comparison and to provide • Financial governance organisation’s financial resilience.
an all-round view of the financial Does the authority demonstrate Amber ratings reflect arrangements that
management arrangements in place and effective financial governance? This are not at optimal effectiveness, but
their effectiveness. focuses on the overall governance of do not pose an immediate significant
financial planning; monitoring and risk if attended to. Green ratings
The thematic areas analysed were: delivery by the senior management reflect adequate arrangements, but not
• Key indicators of financial team; and effectiveness of the necessarily good practice. We have
performance overview and scrutiny of financial included a checklist of good practice in
What are the financial outcomes? matters by council members. Appendix A.
This provides insight into the
overall effectiveness of the financial • Financial control
management arrangements reviewed Has the authority established strong
under the other three themes. This financial controls? This theme looks
includes benchmarking against at the arrangements in place to ensure
the Audit Commission ‘nearest the delivery of financial plans.
neighbours’. This includes savings; the capability
of the finance team; and the
effectiveness of assurance and risk
management arrangements.
2 Rising to the challengeTable 1 Themes and categories for analysis Table 2 Risk rating criteria
Theme Sub-category
Key indicators of financial Schools balances* Arrangements meet or exceed
performance adequate standards
Reserve balances
Green Adequate arrangements identified and key
Performance against budget characteristics of good practice appear to
be in place
Workforce
Borrowing
Liquidity
Potential risks and/or weaknesses
Strategic financial planning Focus of MTFP
Adequate arrangements and characteristics are
Adequacy of planning assumptions Amber in place in some respects, but not all. Evidence
that the authority is taking forward areas where
Scope of MTFP and links to annual planning
arrangements need to be strengthened
Review processes
Responsiveness of the plan
Financial governance Understanding the financial environment
High risk
Executive and member engagement
The authority’s arrangements are generally
Overview of key cost categories
Red inadequate or may have a high risk of not
succeeding
Performance management of budgets
Accuracy of reporting
Financial controls Performance management of budgets
Performance of savings plans
Key financial systems
Finance department resources
Internal audit arrangements
External audit arrangements
Assurance framework/risk management approach
*For single-tier and county councils only
Rising to the challenge 3Rising to the challenge
In 2010, the government spending review triggered uncertainty over whether local
government was facing a financial tipping point that threatened the survival of local
services as we knew them. Four years later, local authorities are still delivering local services
to a high standard within a balanced budget. Many are forecasting financial resilience
confidently in their medium-term financial strategy. This is a major achievement and reflects
an evolution in financial management that would have been difficult to envisage given the
original reaction of the sector to the spending review in 2010.
The narrative around austerity and local Figure 1 Summary ratings over time – all local authorities
government funding reductions has Key indicators of financial performance
been relentlessly negative over the past 2013/14
four years. This was driven largely by
2012/13
valid concerns for the future of local
2011/12
services as we know them. There were
2010/11
also concerns about whether it was
possible to effect change on the scale Strategic financial planning
required and whether local government 2013/14
institutions could survive in their 2012/13
current form. 2011/12
This change would need to 2010/11
be structural, in terms of the way
Financial governance
service delivery is organised, but also
2013/14
cultural, in terms of the way the whole
2012/13
organisation is aligned to the future
2011/12
strategy of the authority. The latter
is arguably the harder to achieve, and 2010/11
therefore the most critical. Financial control
It was always likely that the scale of 2013/14
central government funding reductions 2012/13
would lead to cuts in some service 2011/12
provision. This has started to happen 2010/11
although not to the extent that might
have been expected by this point. 0% 20% 40% 60% 80% 100%
Serious concerns remain about
whether local government services in about the funding structure for local The recent interim report of
the age of austerity can continue to authorities, and whether it allocates the Independent Commission on
meet the needs of the public, in the funding fairly in relation to local Local Government Finance (‘Public
face of demographic and economic geographic, demographic and money, local choice’), concludes that
pressures. Concerns also remain economic conditions. funding arrangements are ‘broken’.
4 Rising to the challengeIt recommends that in the future councils local auditors are concerned this period, with financial control
funding should be entirely locally that their clients will not meet medium- showing particular improvement.
derived – specifically through retention term savings targets. Our analysis With the possibility of greater
of business rates and a revision of aligns with this: 60% of councils of devolution of powers and financial
council tax valuations. The impact on this type within our sample had at freedoms on the horizon, strong
future funding arrangements remains least one amber or red-rated risk that arrangements will become ever more
to be seen. However, the scope of this could affect the delivery of the medium important. Local authority members
report is to question whether local term financial plan if not addressed. and the public are having to come to
authorities can effect large-scale change However, our experience over the last terms with the fact that in future their
and manage with significantly reduced four years gives us some confidence organisations will look and feel very
funding. We are getting the first hints that these risks can be overcome in different to the way they did before
that the answer is yes they can, but not many cases. 2010. But we are only part way through
without impacting significantly on the What stands out is how local the age of austerity and significant
services they deliver. authorities have maintained and in challenges remain which will continue
some cases improved their financial to drive the evolutionary process.
Evolution in the age of austerity performance, in the face of ever
Through our series of reports on the increasing challenges.
financial resilience of local authorities This is even more impressive
over the last four years, we have when you consider that the level
tracked the effectiveness of financial of sophistication and effectiveness
management arrangements. Most required to achieve it has increased year
authorities have weaknesses or risks on year. By March 2015, the first period
in their arrangements of one kind or of austerity envisaged in SR10 will have
another and a minority have multiple been navigated successfully by almost
weaknesses. But there are very few all local authorities.
councils with red-rated, critical Through a combination of necessity,
issues arising. innovation and strong leadership,
The NAO’s report, ‘Financial many organisations have risen to
sustainability of local authorities 2014’, the challenge. Through our work,
provides a note of caution. It states we have seen financial management
that 56% of metropolitan and unitary arrangements strengthen greatly over
Rising to the challenge 5The tipping point? still resonates for them. For single-tier The localisation agenda is gaining
In our earlier reports, we said that authorities and counties, the ‘graph momentum. Greater control over
a financial tipping point could be of doom’ scenarios around demand- financial decisions in local authority
approaching for some local authorities driven services, in particular social areas, coupled with better co-ordination
and that significant work had to be care, remain a key part of the challenge. between public sector agencies, opens
done to avoid this risk. The tipping Broadly these predict that, without up some exciting possibilities for
point could have a number of transformation, local authorities may improving services and delivering them
characteristics, but would broadly only be able to fund social care by 2020 more efficiently.
reflect a point where financial balance if they drastically reduce or even stop We have already seen significant
was no longer possible, recovery was other services. change in the culture of local
no longer within the power of the But even here new ways of authorities. Finance is no longer solely
organisation and the continued delivery delivering services are emerging – such the preserve of the finance department.
of services was no longer feasible as care at home, prevention and early Responsibility, accountability and
(Appendix B). intervention – that can alleviate some financial skills have permeated
This would be a situation similar to of these risks. We are also seeing some throughout the whole management
that suffered by the local authority in progress around health and social care structure. A strong culture of continual
Detroit (USA) and a growing number integration, which is explored further improvement, efficiency and financial
of NHS organisations (in the context in our report on the implementation of control, aligned with the authority’s
of significant deficits rather than the Better Care Fund. By 2016, it will medium term strategy, will become a
bankruptcy). This year’s research has be clear whether the current MTFPs necessity over the next few years. There
enabled us to refine this view, because are on track to deliver. Those who is significant work to be done here,
the uncertainties have started to clear. have struggled to establish effective particularly in regard to engaging front-
The likely destination for individual arrangements to date are those most line specialists in financial management.
authorities is now crystallising in likely to face a tipping point in 2016. This should be an important area of
the next generation of medium-term focus for local authorities.
financial plans that take us up to 2016 What does the future hold? Our report on the future of local
and beyond. Predicting the future is fraught government, ‘2020 Vision’ (2014),
What now seems clear is that with difficulty, particularly as the builds on this and other themes and is a
many local authorities should be in a outcome of the 2015 general election useful companion to this report. ‘2020
position to secure financial resilience is unpredictable and could have Vision’ explores a number of potential
on a sustainable basis, assuming that far-reaching consequences for local scenarios that local authorities might
funding arrangements remain on government financing. But chief face, including ‘adaptive innovation’,
their current trajectory. However, a executives are showing increased ‘running to stand still’ and ‘withering
minority of authorities are still facing confidence about the future of on the vine’.
the prospect of a tipping point and 2016 their organisations.
6 Rising to the challengeAnalysis by authority type Figure 2 Summary ratings by local authority 2013/14
When we divide the findings by County
authority type, we see that the level of Key indicators of financial performance
risk and weakness is not distributed Strategic financial planning
equally. This does not imply that some Financial governance
types are not as well run as others. Financial control
Rather it reflects that different types District
face different levels of pressure, due to Key indicators of financial performance
their size, breadth of responsibility Strategic financial planning
or geographic, demographic or Financial governance
economic profile. Financial control
The analysis shows that single-tier
London
authorities of all types are under more
Key indicators of financial performance
pressure than counties or districts.
Strategic financial planning
This probably reflects some differences
Financial governance
in the funding structures between
Financial control
single- and two-tier arrangements. All
single-tier authorities show strategic Metropolitan district
financial planning as an area of concern, Key indicators of financial performance
which reflects the scale of savings Strategic financial planning
required over the next few years. Financial governance
Financial control
Metropolitan district councils and
London boroughs, both with urban Unitary
demographics, show some similarities Key indicators of financial performance
in the pattern of amber ratings for Strategic financial planning
key financial indicators and financial Financial governance
controls, which are often closely linked. Financial control
The metropolitan borough councils,
concentrated in the north of England, 0% 20% 40% 60% 80% 100%
show a higher number of issues in both
areas, which is likely to be linked to the linked to fewer problems with financial it is harder to draw firm conclusions.
less favourable economic conditions controls. However, they have more However, the counties appear relatively
compared to London – affecting both problems with financial governance, strong compared to single-tier councils,
revenue potential and cost pressures. certainly in comparison to the London despite similar responsibilities for
Unitary councils – often with boroughs. This could be related to the adult social care and other demand-led
a greater rural population and relative access to members with strong services. Financial control seems to be
concentrated in the midlands and south financial backgrounds enjoyed by some the main area of concern. Although this
west of England – show a different London boroughs. has not yet impacted on key financial
pattern with reasonably strong key The population of county councils indicators, there is a risk of this in the
financial indicators. These are perhaps in the sample is comparatively small, so future in some cases.
Rising to the challenge 7District councils fare better. They Analysis by region The south east of England is
do not have the pressures of demand- By classifying councils by region some generally faring better than both the
driven services such as social care or broad patterns are identified. north and midlands across all themes,
large-scale urban or rural deprivation The midlands has the highest level strengthened by the presence of affluent
that other councils face. With some of financial challenge followed by the areas in some London boroughs
exceptions, district councils are north of England. In both cases there and districts.
under comparatively less pressure is a combination of issues which are The south west of England, with its
from current funding arrangements. broadly proportionate across all four more rural profile, fares well in 2014,
However, in proportion to revenue, themes. The north and midlands have a except in strategic financial planning
some districts have had to deliver small number of authorities where the where there is a higher concentration
significant savings and have done this issues are particularly acute (red-rated) of issues than elsewhere. This indicates
largely successfully. that we have not seen in other parts of that authorities are meeting their
There have also been some good the country and the highest frequency financial targets and are reasonably well
examples of innovation, with districts of issues with financial governance. governed and controlled. But there are
leading the way with shared services The midlands also had the highest concerns about the scale of savings and
and joint management arrangements. level of issues for key indicators of transformation required to maintain this
Many districts, particularly in the financial performance, with strategic in future years.
south east, are planning for a near financial planning also being an area
future where they are financially of difficulty.
independent, with services being
Figure 3 Summary ratings by region 2013/14
funded entirely by local taxation and
other revenue streams. The challenge South east
for some districts is to drive efficiency Key indicators of financial performance
and find new ways of working without Strategic financial planning
having the ‘burning platform’ of Financial governance
necessity experienced by other types of Financial control
authority. The motivation should be to Midlands
minimise council tax rises and to fund Key indicators of financial performance
capital programmes within the current Strategic financial planning
financial envelope. Financial governance
Financial control
South west
Key indicators of financial performance
Strategic financial planning
Financial governance
Financial control
North
Key indicators of financial performance
Strategic financial planning
Financial governance
Financial control
8 Rising to the challenge 0% 20% 40% 60% 80% 100%Summary
There is reason to be positive about The importance of these actions will be
the way that local government has magnified if local government devolves
navigated the first period of austerity. further, particularly in relation to fiscal
But there remains much to be achieved devolution. The new-found confidence
if it is to become sustainable in the of local government in responding
long term. Authorities should consider to medium-term challenges will be
how their: tested sorely by the second half of the
• medium- to long-term strategy austerity period and the complexity
redefines the role of the authority created by fiscal devolution, continued
creatively evolution of alternative delivery models
• operational environment will adapt, and closer integration with other
working in partnership with other public bodies.
authorities and local organisations It is unlikely that in balancing
• strategy looks beyond the traditional the books local government will be
two- to three-year resource planning able to preserve all of the services it
horizon currently delivers. Renegotiating service
• organisational culture is aligned to provision with the public (to enable it
where the authority needs to be in to remain within a reducing financial
the medium to long term envelope) will be a key task for local
• senior leadership teams – both government in the next few years.
officers and members – have the
necessary skills and capacity to
ensure delivery against the medium-
term challenges
• corporate governance arrangements
ensure effective oversight and
scrutiny of the organisation as it
adapts to the challenges it faces.
Rising to the challenge 9Key indicators of
financial performance
In the fourth year of our work on key indicators of financial performance, we see a
significant improvement across the board compared to the previous year. While some
authorities continue to struggle, more are returning to the longer-term trajectory of
improvement in delivering sound financial outcomes.
While common in other parts of the Figure 4 Key indicators of financial performance
public sector and the commercial Liquidity
world, the use of financial ratios and 2013/14
performance indicators remains a 2012/13
comparatively rare feature of local 2011/12
authority financial reporting. This is 2010/11
gradually changing though. This type
Borrowing
of analysis is useful as it helps to test 2013/14
whether arrangements that appear to 2012/13
be robust are actually resulting in good 2011/12
financial outcomes. 2010/11
The key performance indicators
Workforce
(KPIs) we use cover a number of aspects
2013/14
of financial performance. Where possible,
2012/13
we draw on the Audit Commission’s
2011/12
benchmarking of financial ratios to
2010/11
provide context.
The majority of authorities continue Performance against budget
to deliver good financial outcomes and a 2013/14
2012/13
robust financial position – a significant
achievement given the challenges they 2011/12
face. Our analysis of sub-category ratings 2010/11
over time shows a long-term trend of Reserve balances
improvement in all areas. But 2012/13 2013/14
saw an upsurge in amber potential risks 2012/13
and weaknesses, with a few authorities 2011/12
incurring red ratings. This position has 2010/11
broadly recovered in 2013/14 although Schools balances
not to the levels seen in 2011/12. 2013/14
In 2012/13, savings challenges started 2012/13
to bite. This may have impacted on a 2011/12
number of indicators. It seems likely that 2010/11
2013/14 is a reflection of the action taken
by authorities to restore control over the
0% 20% 40% 60% 80% 100%
delivery of financial plans.
10 Rising to the challengeLiquidity of authorities where borrowing is
We assess the ‘current ratio’ of sufficiently large to present a risk to
assets (cash or assets that are readily financial resilience (about 6%).
The average number of sick
convertible to cash) to liabilities
days lost in the sample was
(short-term liabilities that require Workforce
eight, broadly in line with the
prompt payment). We then look at We consider a range of workforce
public sector average. However,
benchmarking information to see if the indicators, such as staff turnover,
a minority of authorities had
authority has a low ratio in comparison agency staff costs and the rate of
achieved significantly lower
to its peers and whether there is enough appraisal. However, the primary
rates by revising their workforce
cash to cover short-term liabilities, with indicator we use is the number of full-
management arrangements.
a margin of safety. time equivalent staff working days lost
This is a rough measure which is to sickness during the year. Performance against budget
common in the private sector. The risk High sickness absence has This is a crucial indicator as it helps
of running out of cash is less acute for implications for productivity, as validate both the strength of planning
local authorities, due to the security well as associated costs, for example, arrangements and the effectiveness of
of grant income receipts and the low- agency staff. It can also provide an financial control. A good track record
value, high-volume nature of local indication of working culture and staff of delivering to budget is a strong
taxation, coupled with reliably high engagement, which often have indirect indicator of whether future financial
collection rates. Increasing numbers of financial implications. Although there plans, including large-scale savings,
authorities are taking advantage of the are some fluctuations, the long-term can be delivered.
security of their income to maximise picture is one of gradual improvement, In 2012/13, there was an upsurge in
returns from short-term investments. with most authorities now monitoring budget targets missed. Although there
The low number of amber ratings sickness absence and taking action to has been improvement, a significant
in 2013/14 (6%) reflects the increasing reduce it. minority of authorities (14%) have
recognition that a low current The public sector benchmark is still struggled to deliver in 2014. The
ratio does not necessarily present an average of eight days per full time most common trigger for an amber
a problem, as long as treasury equivalent lost to sickness per year, rating is a significant revenue budget
management is effective. but a small number of authorities overspend. This often relates to
have significantly lower rates that demand-led services such as adult or
Borrowing are comparable to the private sector. children’s social care. This will be a
We look at benchmarking information Authorities with a high proportion of key battleground over the next few
for groups of similar authorities. traditional ‘blue collar’ jobs in-house years and persistent under-budgeting
This includes the ratio of long-term seem to have more problems with in these areas is a danger sign for future
borrowing to long-term assets held sickness absence. Conversely, high financial resilience. Any authority with
(assets are used as a proxy for the size levels of agency staff in areas such as weaknesses in this area that is not well
of the authority) and the ratio of long social care can artificially lower the advanced in service transformation is
term borrowing against tax revenue sickness rate. The longer-term trend of likely to face financial difficulty in the
(revenues are used to assess the ability improvement may reflect the degree immediate future.
to repay from locally-generated income, of outsourcing that has taken place Just under half of the issues raised
as opposed to grant funding that could in the last four years alongside relate to underspent capital budgets,
be withdrawn). In line with previous stronger workforce management. which is often down to unrealistic
years, there is only a small minority planning assumptions or weaknesses in
Rising to the challenge 11the management of capital programmes. transformation, or to invest in schemes
Unavoidable delays are often part and and services, can be limited severely. It Case study
parcel of major capital schemes – which can also force authorities to borrow to At Wigan Council, early delivery of
often span several years – and this fund capital programmes or to forgo the 2013/14 savings plans has
allowed funds to be released for
would not normally trigger an amber capital investment.
the creation of a number of new
risk unless there were doubts about Low or reducing reserve levels is
reserves which will offset some of
capital scheme management. a strong indicator that the authority the risks around the delivery of the
This raises questions about the might struggle to maintain financial Council’s transformation programme.
value of monitoring annualised resilience in the coming years. But The opportunity has also been taken
capital budgets, other than in terms despite the challenges, most authorities to re-prioritise and re-package a
of cashflow, and whether authorities have maintained or increased their number of existing reserves to assist
should be looking at alternative ways of reserve levels to insure against financial in the delivery of the transformation
agenda. Wigan consider the key to
reporting progress on capital schemes, difficulty.
its success in delivering savings
focusing more on the risk of slippage to to be close monitoring and regular
planned completion dates. Schools reserves progress reporting, and building
This indicator only affects county required efficiencies to be built into
Reserves and single tiers with responsibility base budgets, and reviews of specific
We use peer group benchmarking for oversight of schools. This area service area budgets, to maintain
information for the ratio of total has dropped significantly as a risk to provision of high-quality, responsive
useable reserves (general fund, authorities over the four-year period. and cost-effective service.
earmarked reserves and useable This is partly in recognition of the
capital receipts) compared to the gross limited control they can exercise
cost of services. Comparison of the over schools and the limited risk that
authority to the average for other financial difficulties at a small number
similar authorities provides a useful of schools could have a material effect
starting point for discussion about on the authority’s finances.
whether reserves are sufficient. We also In addition, increasing numbers of
consider whether reserve levels are schools have transferred out of local
reducing year-on-year and whether this authority control over the four-year
is part of a measured plan or whether period. Where school reserves are low,
the authority has, for example, used it is often because of their cumulative
reserves to cover an unplanned revenue failure to deliver to budget or to
budget overspend. set aside reserves within financial plans.
In 2013/14, the number of ambers In these cases, the local authority
relating to reserve levels has reduced, has a responsibility to help the
in line with the longer-term trend, schools to recover a more sustainable
28% of authorities, many of them
although a minority of authorities financial position.
single tier, considered themselves
(11%) did have notably low levels
at risk of a financial tipping point,
of reserves. In these cases, the ability
at some point between 2016 and
to absorb unexpected financial
2018 if financial plans were not
shocks, to maintain services during
delivered.
12 Rising to the challengeStrategic financial planning
Local authorities have continued to improve and strengthen their strategic financial
planning arrangements in line with the long-term trend. Many authorities have delivered
their first post-2010 MTFP and have developed new plans for the period to 2016 and
beyond. These new plans reflect the additional skills, insight and experience that they have
acquired over the last four years.
Robust strategic financial planning is Figure 5 Strategic financial planning
crucial to the future financial resilience Focus of MTFP
of local authorities. Our analysis 2012/14
shows improvement across all sub- 2012/13
categories within the planning theme. 2011/12
This is a strong indication of significant 2010/11
evolution in the sophistication and
Adequacy of planning assumptions
effectiveness of planning processes. It is
2013/14
partly driven by necessity, but also by
2012/13
the realisation that future financial risks
2011/12
and pressures need to be understood
2010/11
fully, modelled and planned for, to an
extent not previously considered. Links to other strategies
Authorities have made particular 2013/14
advances in the adequacy of planning 2012/13
assumptions and the responsiveness 2011/12
of the MTFP. The level of ambers for 2010/11
the ‘focus of the MTFP’ sub-category Review processes for the MTFP
has improved only marginally and 2013/14
remains a concern for a significant 2012/13
minority of authorities. 2011/12
2010/11
Focus of the MTFP
Responsiveness of the MTFP
This area looks at the overall scope
2013/14
of the MTFP, the range of forward
2012/13
planning and the extent to which the
planned outcomes are achievable and 2011/12
aligned to the longer-term financial 2010/11
health of the authority. Although
0% 20% 40% 60% 80% 100%
arrangements at most authorities remain
adequate in proportion to their overall
the underlying financial modelling, or The most common trigger was
financial position, a significant minority
a failure to maintain a fully-developed the scale of savings that needed to
(15%) carry potentially significant
financial planning horizon of at least be achieved over the life of the plan,
risks and weaknesses in 2013/14 – a
three to five years. particularly where it was unclear how
consideration of different scenarios in
Rising to the challenge 13this would be achieved. In almost all demographic information to predict
Case study cases, some or all of the in-year savings growth in demand for services, for
At St Helens Metropolitan Borough requirement for 2015/16 and beyond example in adult social care, as well as
Council (MBC), fully integrated the potential for growth in council tax
had yet to be matched to defined
financial and service planning together
savings schemes. In some cases, the and business rate income. Assumptions
with joint financial and performance
reporting help to ensure that it can short timescale for delivering these around income growth – whether
concentrate resources on achieving savings was the main concern. In from fees and charges, property or
priority outcomes. Departmental addition, some authorities continue other investments, or from commercial
directors and the assistant chief to rely on further efficiencies and income sources – also feature much
executive for finance hold monthly top-slicing of budgets rather than more strongly.
meetings to discuss budgets, A minority of authorities (10%)
transformational schemes.
progress against key performance
In this small number of cases, the still have risks around the financial
measures, issues relating to service
ambers could quickly turn red in the assumptions. There is some crossover
delivery and actions required to
address any identified concerns. next two years if significant progress here with the focus of the MTFP sub-
The result is that clear, consolidated is not made. By 2015/16, it will be category, in that the scale of savings
reports, covering both budget and apparent whether the current MTFPs, required also features as a prominent
service performance monitoring, are particularly those with significant amber trigger. Under this sub-category,
presented to cabinet on a monthly the lack of a strong track record of
savings, can be delivered. This supports
basis. delivering savings casts doubt on the
our contention in previous years
St Helens MBC also believes that that for at least a small number of assumption that the large-scale savings
gathering the views of local people authorities, 2016 will mark the financial needed could be delivered. In some
and key stakeholders should be cases, there was a doubtful assumption
tipping point.
an integral part of the budget- that previously weak arrangements for
Conversely, we have seen that
setting process. Through its budget
increasing numbers of district councils, delivering savings could be improved
consultation and budget simulator
initiatives, the council allows particularly in the south east, are quickly enough to achieve plans in the
interested parties to advise on the planning for a future where they are following year. Other triggers related to
most valued areas of its spend. The broadly self-funding, with MTFPs a range of authority-specific issues.
council makes the budget consultation that reduce the reliance on central
available annually, and publishes a government grant to a bare minimum. Links to other strategies
summary report on its website. At the There has been a consistent and gradual
same time, work continues in the form improvement over the four years of
Adequacy of planning assumptions
of zero-based reviews of portfolio
This area has seen significant review in this area. Authorities have
budgets, and reviews of specific
service area budgets, to maintain improvement in 2013/14, compared to increasingly demonstrated effective
provision of high-quality, responsive the prior year. This probably reflects and mutually supportive links between
and cost-effective service. the number of new MTFPs that have
come on line during the year, for
2014/15 and beyond, and the fact that
the depth of analysis in many cases is 33% of authorities had a planning
significantly stronger than in the first horizon on their MTFP of only
wave of plans in 2010/11. two years. 26% had a horizon of
For example, we are seeing three years and only 36% had a
increasingly sophisticated use of horizon of four years or more.
14 Rising to the challengemost of these cases this was mitigated
Case study by evidence of a longer-range view
Case study
A number of councils have provided by the underlying financial
demonstrated innovative thinking in Councils across the country have
modelling and revised savings and
achieving efficiencies in their services developed initiatives to make savings
transformation plans. in back office expenditure, without
and delivering better services for less.
Elmbridge Borough Council’s work depleting resources. The London
in collaborating with neighbouring Responsiveness of the plan Borough of Bexley has reduced the
authorities in the joint delivery of This is another sub-category that has number of physical offices used by
family support services was notable seen significant improvement since council staff and reported savings in
in its success in delivering improved 2013/14 and reflects the new generation annual running costs of £1m at the
outcomes for families and also of MTFPs. The main focus is on the start of 2014/15, rising to £1.5m
resulting in reducing cost to public in future years, as a direct result of
ability of the plan to absorb financial
services overall. this process. In addition, the surplus
risks – specifically the extent to capital receipts generated from the
which adverse scenarios have been disposal of former office sites will
strategic plans, the MTFP and service
anticipated and mitigated against – and also reduce the need for borrowing to
plans; and links to supporting strategies
on the flexibility to deal with as yet fund the council’s capital programme.
such as treasury management, capital At Stockport Metropolitan Borough
unforeseen scenarios.
programmes, housing, workforce Council, the roles of staff have
The strength in this area is partly
and other areas. The few ambers changed to create greater efficiency,
related to the fact that most authorities
that were raised tended to relate to with roles becoming more generic to
have set aside significant reserves
individual supporting strategies that allow for greater flexibility in the back
to provide this flexibility. Many office. Tewkesbury Borough Council
needed reviewing.
authorities have also built further has redeveloped their property and
contingencies into their annual budget. rationalised the space utilised by their
Review process
A number of authorities have benefitted own employees, allowing them to let
This area has consistently been out space to other entities, such as
from their policy of delivering savings
the strongest sub-category in the the county council’s adult and children
in advance of need and then stripping
theme. Almost all authorities review social care services, the police, the
the savings from the start of the new
their MTFP annually, including DWP, the fire service and the Citizens
financial year.
presentation to members. In many Advice Bureau, creating a ‘public
This means that savings plans sector hub’ to give local people a
cases this has prompted amendment
delivered early provide additional centralised location to access a range
of the MTFP, often in regard to the
unbudgeted savings that can be held in of services. The annual rent benefit
quantum or phasing of savings needed
reserve or used to tackle other budget to the council is currently £160k with
– for example, following government £235k expected in 2015/16.
pressures. Others have benefitted from
announcements.
budgeting investment income based
In a few cases, the MTFP had not
on worst-case scenario returns, in the
been refreshed, with significant changes
expectation that income will exceed
being made in annual budgets, resulting
that planned. As long as the use of
in a lack of coherence between the two. The average annual savings
additional income to fund overspends
In other cases, the MTFP had been requirement for 2013/14 was 1.5%
is reported transparently – corporately
allowed to run down to within a year of the gross cost of services. This
and by services – this is a reasonable
of completion, potentially reducing the was broadly consistent across all
and helpful strategy.
forward-planning window. However, in types of council. The highest level
of annual savings was 4.6%.
Rising to the challenge 15Financial governance
Financial governance remains a relatively strong area for local authorities. In addition to
providing oversight and scrutiny, the executive team and members set the tone and the
culture of the organisation. This is emerging as a key factor in ensuring financial resilience.
Our work in this theme indicates that Figure 6 Financial governance
overall financial governance continues Understanding of the financial environment
to strengthen, particularly in the quality 2013/14
and access to information presented 2012/13
to members. This facilitates effective
2011/12
oversight of financial delivery.
2010/11
The relationship between members
and the management of the authority Executive and member engagement
is a complex one, where political and 2013/14
administrative priorities need to be 2012/13
balanced carefully. Members are not 2011/12
necessarily experienced in financial 2010/11
matters, but the onus is on them
Overview for controls over key cost categories
to engage in the process alongside
2013/14
management’s responsibility to support
2012/13
them with advice and information.
2011/12
These factors have to be taken into
account when we are assessing what 2010/11
adequate arrangements look like. There Budget reporting
will always be some tension between 2013/14
the competing priorities and concerns 2012/13
of members and management. 2011/12
Although there is an overall
2010/11
reduction in the number of ambers
in the detailed sub-categories, there Adequacy of other reporting
is a slight increase in the number of 2013/14
authorities where governance was rated 2012/13
amber overall. While weaknesses in 2011/12
governance are relatively rare, where 2010/11
they do occur they tend to result in
serious financial and/or reputational 0% 20% 40% 60% 80% 100%
issues and can affect a broad range of
group structure can still present a
operational areas. While there may be
significant risk if not reviewed and
relative strength in core governance
tested adequately.
procedures, weak governance over key
partnerships and within an authority’s
16 Rising to the challengeCase study
17% of authorities do not view cultural change as a priority in regard
to delivering financial plans and savings. 28% do regard it as important London Borough of Sutton has
demonstrated how integrated
but have yet to take action. 28% have attempted to change the culture
reporting can improve members’
with limited success. Only 32% have managed to improve the financial understanding of the whole picture of
culture of the organisation successfully. delivery. Their Strategy & Resources
Committee reviews the financial
Understanding the financial of financial efficiency as a priority, performance report with integrated
environment whatever the financial position. KPIs including customer service
This indicator looks at the extent to In these cases, the onus is on officers and workforce information on a
which members and management have to take a stronger role in helping quarterly basis. Members therefore
a good grasp of the financial conditions review service performance in the
develop their appreciation of the
and risks that the authority faces context of the financial envelope and
financial environment and the
the progress of the major change
currently and in the next few years. longer-term outlook. programmes, including savings
It also reflects on the organisation’s Member training on financial delivery against targets. The balanced
culture for finance and the strategic matters and their role in governance scorecard includes customer
tone that the leadership has set. remains a weak point at many feedback and workforce KPIs in a
As might be expected, the level of authorities. This is particularly acute in summarised accessible format.
understanding is high, with over 92% a year that has seen many new members By developing a detailed MTFS
of authorities rated as green. arriving following election. with a planning horizon to March
Over the past few years, members 2019, in line with their new Council
have had to make increasingly difficult Executive and member engagement Corporate Plan, London Borough of
decisions about the delivery of This looks at the extent to which Sutton has also been able to identify
services. A better understanding of the savings requirements on a long-range
members and the management team
basis and put mitigating planning
underlying issues helps to build mutual engage with the financial planning and
arrangements in place to ensure
confidence with the management team delivery and act to address problems as that they are met. When the MTFS
and to extend the organisation’s risk they arise. It also looks at the extent to was revised in July 2014, it was
appetite. This is particularly apparent in which members participate in and drive determined that the projected funding
the increasing levels of innovation, for the process of financial governance. gap over the period of the plan would
example, with joint working between Again, this shows a slight be £38m, due to cost pressures and
authorities and other partners, and improvement from 2012/13, and significant forecast reductions to the
setting up alternative delivery models revenue support grant. By formulating
remains a relatively strong area with
this projection in advance, Sutton
for services. 93% of authorities rated green. Where now have scope to develop and
There are still a small number ambers and one red did occur, this deliver efficiency plans phased over
of cases where members have been was related to: insufficient scrutiny of a significant period of time, easing
resistant or slow to appreciate the need financially significant decisions; lack the burden on staff and the impact on
for a more radical outlook in regard to of effective action taken on reported service users.
the sustainability of services. Some still financial delivery issues; and insufficient
look to the back office or to piecemeal challenge or awareness of financial
efficiencies to provide the savings they plans and amendments to budget.
require, and do not see a strong culture
Rising to the challenge 17Case study
Members receive detailed financial information at committee every
Herefordshire County Council has two to three months at 73% of authorities. They receive monthly
taken a bold move in response to
information at 16% of authorities. Only 11% receive updates less
changes in provider markets, bringing
previously outsourced services
than quarterly.
back in-house and restructuring
existing outsourced contracts. When
Herefordshire identified that the Overview of key cost categories Budget reporting
outsourcing of its social workers to This looks at the extent to which the This covers the scope, depth and
a local NHS Trust to deliver some governance arrangements provide accessibility of budgetary performance
aspects of its service was not members and the management team information provided to members. The
delivering appropriate outcomes,
with a good grasp of the full range last four years have seen a consistent
the contract was terminated, a
of financial and operational issues year-on-year improvement in this
radically redesigned in-house social
work service implemented and affecting the authority. This is another area. By 2013/14, 89% of authorities
the direct provision elements re- relatively strong area and has seen were rated green. However, it remains
commissioned, delivering significant significant improvement in 2013/14. the most problematic area in the
cost savings. Herefordshire have also One key area of improvement has been governance theme.
renegotiated their leisure services in the way that audit committees follow Our focus on recommending
contract, using capital investment up internal audit recommendations improvements to our clients in the
to improve facilities, increase
properly. The managers responsible area of reporting to members has
participation, reduce subsidy cost and
are increasingly being held to account helped to fuel this improvement. But
improve public health outcomes.
– often being called into meetings to most authorities have themselves
explain non-compliance. recognised the importance of strong
This has also led to the agreement high-level reporting as a key pillar of
of appropriate recommendations strong financial governance – in many
being given more importance. We have cases prompting internal review and
seen an upsurge in the establishment consultation with members.
of member-led financial scrutiny More authorities are now achieving
committees or other finance- a good balance in the breadth and depth
focused groups, within the authority of the information provided. Methods
governance structures. This additional for drawing attention to key matters
focus can often have a significant such as traffic lighting for risk are
impact on the delivery of financial becoming more prevalent.
plans and savings, particularly in Amber ratings in this category
larger authorities. are related to a number of common
themes. The frequency of reporting to
members at committee was a concern
at some authorities. In some cases this
was less than quarterly. This can be a
particular problem where the authority
18 Rising to the challengehas significant financial challenges. This was another area of focus
In these cases, reliance on member for making recommendations to our Case study
newsletters to keep them informed clients. 2013/14 has seen a significant Christchurch Borough Council and
between meetings and to prompt improvement in this area. However, a East Dorset District Council are
working in partnership to facilitate a
challenge may not be adequate. Indeed, number of authorities still do not report
better level of service provision. A
quarterly review by committee may not savings plan progress separately. Where joint management team was formed
be sufficient. savings are delivered a year in advance in 2010, which initiated a three-
The accuracy of forecasting budget of need, to be stripped from the next year programme of shared service
outturn was variable, sometimes year’s budget, some authorities consider reviews – bringing teams together,
resulting in significant variances and that budget reporting is sufficient to reviewing work processes and
amendment between reports. The check that the saving has worked. But restructuring as required. This is now
quantity of information provided, this can deny members the chance to almost complete and has delivered
significant efficiency savings. Both
especially where the key points are not see if the next year’s savings are on
councils also share their revenues and
adequately drawn out, remains a barrier track before it becomes apparent in benefits service provision with North
to member engagement in some cases. budget planning discussions. Another Dorset District Council and Borough
Large variances on capital budgets was advantage of monitoring savings is that of Poole through the Stour Valley and
again a common amber trigger – the members can be clear on the distinction Poole Partnership, and their waste
emphasis in this theme is on the between recurrent savings delivered to provision is part of the Dorset Waste
level of challenge by members on plan and short-term fixes – for example, Partnership which it formed with five
other authorities.
reported variances. from income windfalls – that will have
to be dealt with in future years.
Other reporting This understanding is vital in being
This looks at the scope, depth and able to challenge the performance
accessibility of non-budget-related of officers, particularly where large-
financial monitoring information. In scale savings are required over a
particular, it considers the way that number of years. Another factor in the
savings plan performance is monitored improvement seems to be the increasing
and reported to members. In 2011/12 use of an integrated balanced scorecard Progress against savings plans is
and 2012/13, when many authorities approach to performance management. routinely reported separately to
were delivering large-scale savings This enables financial pressures to members at 47% of authorities.
in year, we saw an upsurge in amber be viewed in the context of service But 18% report savings to the
ratings. This was often where members performance, workforce and other management team only and 35%
received very little information on operational aspects. Authorities are do not report savings plan progress
savings plan progress, other than as a increasingly moving away from the old as part of their routine financial
general feature of delivering the budget. idea of reviewing financial performance monitoring process.
in isolation.
Rising to the challenge 19You can also read
