CIPFA backs alternative tool for measuring councils’ financial resilience
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Another model aimed at measuring the financial sustainability of councils has joined a crowded field, with the claim that more than a third of councils are at risk of failure in the next decade.
Accountancy firm Grant Thornton this week launched its Financial Foresight model, built on central government data, combined with population projections and sector insights.
It shows that in 66% of councils, spending on services is outstripping income and that the imbalance between expenditure growth and income growth will see local authorities reducing their reserves by 84% by 2028.
Phillip Woolley, partner and head of public services insights and consulting at Grant Thornton, said: “Almost all councils now have financial resilience challenges, driven from rising demand and falling income levels.
“To move forward effectively, local authority leaders need to have an in-depth understanding of their own place and be able to develop robust plans against this local context.”
In a report on the model, the firm London boroughs are the most exposed, with 78% forecast to be at risk of financial failure over the next decade.
It also finds that 49% of unitary authorities and 50% of metropolitan councils are at risk over the next decade, with counties the category at the next most risk (44%).
By contrast, only 21% of district councils are set to become at risk, which the report said reflected the fact they have no statutory responsibility for social care services.
The report has been backed by the Chartered Institute of Public Finance and Accountancy.
In a foreword to the Grant Thornton report, CIPFA chief executive Rob Whiteman said: “Across income and expenditure, as well as supply and demand, councils are facing multiple intersecting and sometimes competing challenges.
“Strong and consistent standards of financial management coupled with clarity of purpose and strategic focus will be vital in this new era.”
CIPFA has already created its own Financial Resilience Index, aimed at predicting which councils could run into trouble at an earlier stage.
In December, the Chartered Institute of Public Finance and Accountancy published a briefing on its emerging index which claimed that 12 councils could run out of reserves within four years at current rates.
However, it has yet to release its assessment of individual councils, and a furore ensued recently when the BBC claimed to have identified the councils at risk.
In addition, treasury adviser Arlingclose uses its own financial resilience analytical tools to assist councils using its peer-to-peer lending platform.
And last year, Melanie Dawes, permanent secretary at the Ministry of Housing, Communities and Local Government outlined details of her department’s own method of analysing the financial sustainability of councils.
She told MPs: “We map distributions on a number of different criteria, and we will look at those authorities that are outliers on more than one criterion and that will generate a group of authorities, sometimes in similar circumstances, such as social care authorities.”
Elsewhere in Grant Thornton’s report, the firm concluded that Brexit is likely to cause issues for the government’s aim of allowing councils to retain 75% of business rates income.
It said: “While the business rate retention plan will reflect fair funding and redistribution, Brexit looks likely to make the overall cake smaller.”
In addition, it said that councils’ use of housing companies have faced barriers and not delivered the amount of housing originally anticipated.
Woolley also said that reduced resources have led to the centralisation of the finance function within councils, and a reduction in finance staff embedded in service departments.
“Generally, this has led to an improvement in the financial literacy of those budget holders in the services now having to engage more directly in budget issues,” he said.
“But it has become more difficult for corporate financial managers to develop the detailed knowledge of the service, which is an important component of an effective system of control.”
