Surviving the storm: how resilient are local authorities?

Local government has coped with cuts so far, but must prepare for future challenges, says Guy Clifton, local government advisory lead  at Grant Thornton

Ten months  in to the four year challenge set by the Coalition Government’s 2010 Spending Review (SR10),  local government has faced some of the largest reductions in funding in the public sector.  With a heady mix of a turbulent economy, an expanding and ageing population and the Coalition Government’s policy agenda of localism, open public services and big society, it’s fair to say that local authorities have faced, and continue to face, a ‘perfect storm’.

As auditors and advisers to the local government sector, Grant Thornton has been working closely with authorities to navigate the reality of the changes brought about by SR10.  Now, as demands on the sector continue to increase and further funding reductions are due we have conducted a review of the financial health of 24 English authorities to provide an up to date picture of how the sector is coping and to assess the financial challenges it continues to face.

The review applies a ‘traffic light’ system of risk rating to the following themes: key indicators of financial performance; strategic  financial planning; financial governance and financial controls.

Strategic financial planning
Of the four themes reviewed,  strategic financial planning had the best average rating across our sample with 93% receiving a green rating, which means most authorities responded well to the 2011/12 financial planning cycle. However, as 2011/12 represents the first year of the SR10 period, the challenge is only beginning. It is therefore critical that local authorities maintain an effective grip on financial planning.

In particular, authorities will need to improve in areas such as sensitivity analysis and scenario planning. Adequacy of planning assumptions  was the weakest category in strategic financial planning, with 36% of our sample receiving an amber rating.

Financial governance
Authorities are demonstrating good financial governance, with 86% receiving green rating. We found comprehensive levels of timely financial reporting to senior management and members. Of our sample 93% were rated green for adequacy of reporting.

Authorities in our sample also demonstrated a good understanding of the financial environment (79% green rating) and an appropriate level of senior management and member engagement (79% green) in relation to financial planning, reporting and management.

The lowest score in the governance category was performance management of budgets with 29% receiving an amber rating. This indicates that the ability to manage volatile, demand-led budgets remains a challenge for many authorities.

Key indicators of financial performance
With 86% of authorities rated green for financial performance,  local authorities have generally acted prudently over a long period and are accordingly better placed to weather the SR10 storm. However, reserves are starting to be used and from 2012/13 onwards could be further depleted.  It is vital that reserve levels, both general and earmarked, are carefully monitored to ensure the financial health of councils during SR10 is maintained.

Of the sample, 35% scored amber for liquidity, which looks at the working capital ratio, indicating if an authority has enough current assets to cover its short-term liabilities. Councils will need to ensure liquidity is carefully monitored, for example in the collections of council taxes during challenging economic times, and also the collection of business rates, should this income be retained by authorities as is currently being proposed.

Absence management is a critical issue for authorities as pressure continues to deliver more for less. 57% of the sample received amber ratings – the highest level of risk within the financial performance theme. Authorities will need to ensure they effectively manage unplanned absence levels, to  improve productivity and maintain service continuity.

Financial controls
Financial controls is the weakest area overall with 29% receiving an amber rating and 71% green.  Widespread reductions in staff have impacted on finance departments’ ability to provide the same level of support to services. With 22% of our sample rated amber for finance department resource, headcount reductions are an increasing challenge. Many authorities are restructuring their finance function – often centralising  resources to provide more focussed support to services. The cultural changes required by services as greater financial responsibilities are passed to service managers and budget holders are also a significant challenge.

Summary
Overall, and perhaps surprisingly given the sector’s initial reaction to SR10 and the scale of funding reductions required, local authorities have coped well so far.

Though this is positive, the challenges facing the sector remain significant and very real. There has been effective leadership from senior management and elected members who have not shied away from making some very difficult decisions.  The task moving forward is to continue to implement decisions affecting 2011/12, the impact of which will not be easy for service users, staff and other stakeholders.  In addition, further savings will have to be made over the next three years of SR10.

See the summary findings of the report here: Surviving the storm: how resilient are local authorities?