Financial resilience index revisions set to scrap traffic light indicator on reserves

The Chartered Institute of Finance and Accountancy (CIPFA) is proposing changes to its financial resilience index – including the removal of the “traffic light” indicator on reserve levels – following feedback from the sector.

The resilience index was launched last year in an attempt to provide an early warning system for councils that could find themselves in financial difficulty, in the wake of the Northamptonshire County Council debacle.

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Originally, CIPFA proposed traffic light indicators for all six of its criteria, but this was dropped for all but the reserves category when the index was released late last year.

And this year’s revised version will see the complete removal of the traffic lights ranking for reserves.

Andrew Burns, associate director at CIPFA, told Room 151: “We are moving toward a dashboard. There will be no ‘red’, ‘amber’ and ‘green’ ranking for reserves. It was too crude and gave undue attention to one single measure.”

Burns said that other tweaks to the index for this year would aim to balance “forward-looking” indicators with “backward looking” measures.

In June, a number of councils expressed outrage after being named by the BBC on a list of those likely to run out of reserves, based on information from the index.

One of those on the list, Knowsley Council, said its low reserve level was down to a one-off payment for pensions contributions.

It complained that there was no recognition that the money would be transferred back into reserves from the permanent budget on a planned basis over a number of years, leading to no long-term decrease in its reserves.

Without referring specifically to this case, Burns said: “The new indicators are aimed at recognising that reserve levels are not just about one moment in time.”

Another proposed change will be to give greater weight to the relative size of councils than in last year’s version.

Last year, comparisons were only available by council type (counties, unitaries, etc) but the new version is set to introduce a more sophisticated system including “comparator groups” of similarly-sized authorities.

Burns said: “If you have a debt of £50m and you are a small council, that is quite different to if you are a big council.”

The proposed changes are expected to be approved following consultation with treasury societies at the end of this month.

Council’s revenue outturn data, on which the index data is largely based, are due to be published in mid-November, with the new version of the index expected to be published shortly afterwards.

Burns said that discussions are taking place about how widely the index is published – last year, it was only provide to finance officers within local councils.

“The intention is that it will go to section 151 officers in the first instance again,” he said.

“But there is a debate to be had about going more public with it.”

In July, accountancy firm Grant Thornton launched an alternative model for measuring local authorities’ financial resilience, built on central government data, combined with population projections and sector insights.

It showed 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.

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