Crunch time: Building a ‘robust and adequate’ budget

It’s budget time for local government and CFOs across the country are wrestling with their statutory responsibilities. Andrew Hardingham writes that in the end it comes down to looking at the requirements and then making a judgement.

It is the time of year when local government CFOs are turning their minds to the annual challenge of reporting to their councils whether their budgets are robust and the reserves are adequate.

Section 25(1) of the Local Government Act, 2003, requires the chief finance officer (section 151 officer under the Local Government Act 1972) to report to the council when setting the council tax on the robustness of the estimates in the budget and the adequacy of the proposed reserves.

Before we can do this, we need to understand what being “robust and adequate” means.

Definitions

Turning to the Cambridge Dictionary, robust is defined as “strong and unlikely to break or fail”.

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Looking at my council’s budget, 45% of the net budget is allocated to provide care services to adults (the biggest proportion by far), whilst 20% is allocated to provide services to children, young people and families.

Each of the last three years, my council has failed to contain the unprecedented cost increases within its children’s budget by 12%, 19% and 15% respectively. Was it right, therefore, to say the children’s service budget was robust?

To answer that we have to look at the quantum of children in care and their circumstances.

The analysis of the number suggested that volumes were staying fairly static but average costs were rising. In my council’s case, increases were mainly driven by a few exceptional high cost cases: children with extremely challenging needs demanding round the clock care.

Let us do the maths: £10,000 per week for one child equates to £500,000 per annum. The equivalent generated from a 0.5% council tax increase. Two children would account for the maximum allowable tax increase. Or, expressed a different way, 120,000 residents contributing to the needs of two children.

Questions

Two questions arise. Firstly, could this be foreseen? Well, probably not. At the time of setting the budget the plans were reviewed and considered “sound”. Was the budget “strong”? Probably, but with the benefit of hindsight not “unlikely to break or fail”.

The second question (which leads to a completely different debate): Is this right? Is it right that such a high proportion of council tax income goes towards funding the needs of so few?

Maybe such a scenario is why councils are being forced to look for opportunities to raise income from “commercial sources”.

Local authorities now have the powers to do what the reasonable person would do. As finance directors, we try to be prudent but we also try to facilitate financing options to allow services to be delivered.

Purchasing an asset for regeneration purposes (in accordance with the local plan) that happens to generate a rate of return after costs and provisions seems sensible business to me, thus helping to underwrite the budget.

Reserves

Turning to the issue of “adequate reserves” is, maybe, more challenging. What is adequate? Our trusted source, the Cambridge Dictionary, suggests “enough or satisfactory for a particular purpose”.

What is, therefore, the purpose of reserves? Many councils will, in a prudent way, set aside or earmark funds for future projects—good, sensible financial planning. They will also receive grants and other external funds to be used for specific purposes and, from time to time, set these aside in reserves. They will also make provision for bad debt. Housing authorities will probably have large reserves derived from capital receipts set aside to repay debt. All of these will account for particular purposes.

Leaving that to one side, we are then left with the General Fund Working Balance (or whatever your council calls it). This is the rainy day fund that no one wants to dip into because, like all savings plans, once spent is not easy to replenish.

Back in the good old days of the Audit Commission, councils were encouraged to use their balances to finance budget plans with the aim of keeping taxes down. The figure of 5% of net budget appeared and soon became the benchmark for councils. But is this right? What does it mean?

Going back to our child care example, a few extreme cases may constitute a “rainy day”. Another example could be the unforeseen costs arising from Brexit. Is that a rainy day? What about sudden PWLB interest rate hikes? Is that a rainy day? How many rainy days do we have to allow for? We have the Bellwin scheme to fall back on, for emergencies, but there are rules before it can be accessed.

So, as CFOs we have to make judgements. We assess the risk, the balance of impact and likelihood, and try to keep the balances at an adequate level. Then we have to assure our elected members that all is well; we can survive another year or, to put it into audit language, we are a “going concern”.

Andrew Hardingham is service director for finance, finance, Plymouth City Council.

The views contained here are those of the author only.