Districts show resilience through austerity

District councils have significantly lower liabilities as a proportion of assets than other types of council, according to new data from the Audit Commission.
The commission has released the final update of its Financial Ratios tool before it is abolished in April next year.
The tool provides comparisons between councils’ income, assets, debt and reserves from 2007/08 to 2012/13.
The document said: “The average ratio of assets to liabilities for district councils was higher in 2012/13 than in 2008/09…and consistently higher than for other types of council over this period “
Districts, on average, had assets equivalent to 280% of their liabilities, compared to around 200% for London boroughs – the next highest category on the list.
Metropolitans, which on average had only 10% more in asset values than liabilities, came bottom of the pile.
According to the analysis, in 2012/13, 16% of councils – including 42% of metropolitan districts –actually had liabilities exceeding asset values.
The commission warned them: “Problems paying creditors, however unlikely, present a significant reputational risk for councils.
“These councils…should satisfy themselves that they have arrangements in place to meet their liabilities. There may be additional costs for councils that rely on short-term borrowing to pay debts.”
Half of councils, including 71% of districts, had assets worth more than double their liabilities, with nearly a third of districts and “two single-tier councils” having more than four times.
The commission warned: “Councils with very high ratios…should consider whether they are managing their current assets in the most effective way.”

Reserves v current spending

Districts also had much higher levels of useable reserves compared to gross revenue expenditure than others.
In 2012/13, districts’ reserves made up on average a fifth of their revenue spending, while other councils’ ratios ranged between 0.09 and 0.13.
The report said: “All councils should continue to ensure that their reserves remain adequate for planned future needs and contingencies without placing undue constraints on current expenditure.”
At the other end of the spectrum, a third of councils – including more than half (52%) of districts – had reserves equalling more than a fifth of revenue expenditure. One in ten had reserves larger than 40% of such spending.
The commission warned: “Councils with very high levels of reserves relative to their spending should review the purposes for which these are held to ensure they are still required.”

Long-term borrowing v tax revenue

Districts also have a lower proportion of long-term borrowing compared to tax revenue.
On average, districts’ borrowing made up 75% of tax revenue in 2012/13, compared to around 155% for metropolitan districts.
However, in 2012/13, 72 councils had a level of long-term borrowing that was four times greater than their tax revenue.
A rise in these ratios affected all councils over the period, and was attributed to increased borrowing coupled with an inability of tax revenue to keep pace.
It also reflects the impact of some councils taking out extra debt as a result of government reforms to the housing revenue account system, the commission said.

Long-term borrowing v assets

Elsewhere, the analysis showed that the majority of councils saw an increase in long term borrowing compared to the value of long-term assets over the whole period.
This was put down to the level of long-term borrowing rates along with a decrease in long-term asset values.

Tool’s future in the balance

The commission said its Financial Ratios tool would no longer be available when it closes its doors next year.
But it has asked the Local Government Association to incorporate the ratios and existing data into its Local Government Inform benchmarking service.
Jeremy Newman, chairman of the Audit Commission, said the tool, originally developed in 2009, is “a valuable resource for local bodies and, even more so, for members of the public wishing to scrutinise local financial decision-making”.
“For the government to achieve its aims of promoting greater transparency for public finances, and greater accountability to local taxpayers, there remains a need for tools, like the Financial Ratios tool, that make access to data easier and support ‘armchair auditors’ to make informed comparisons between organisations,” he added.