Funding gaps and how to manage them

Budgets have been compiled but how will local authorities confront funding gaps? And will they continue with commercial investments or focus on other priorities, like local housing? We asked the experts to give their view.

Dan Bates

Funding gaps are here to stay for a time yet. Social care pressures, the so-called fair funding review, reset of business rates and possible reform of New Homes Bonus have all contributed to budget gaps. And that’s before we even consider Brexit and Covid-19.

So, many have turned to commercial property investments to meet their budget gap. My view on this is, if done carefully with appropriate due diligence, then surely this has to be a preferable alternative to cutting services and managing decline.

Three things

But how to do it carefully? I would look at three areas.

First, financial yield comparing guaranteed property incomes, taking account of any voids, with costs including capital costs of minimum revenue provision (MRP) and interest. A bit more on this at the end of my piece.

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Second, risk analysis should have a good look at the lease. A full insuring and repairing lease with regular rent reviews and long unexpired lease term, coupled with a review of the tenant’s financial covenant, can give reassurance in respect of income certainty. Expert advice on location, market conditions and alternative (plan B) uses for the property are also essential.

Third, and perhaps of most importance to this debate, social value. Can we use our property investments to help deliver well-being to our area? This is where we should be able to show regenerative benefits of our property investments, but also by using the disciplines described above to consider capital investment in other priority areas such as building affordable houses and solar farms.

Our of area

It is this final consideration where out-of-area investments do less well. However, a risk-based approach might argue that such investments provide a more balanced portfolio and lower reliance on one area.

Moreover, out of area investments might not deliver direct well-being benefits for the Council’s area but the financial returns from the investment certainly will!

And one final view. This is undoubtedly a hot topic and one that needs resolution. I would hope, as a sector, we can come to a rational and workable solution.

I would start with improving the Prudential Framework. Hands up if you feel that your prudential indicators provide a really clear view of prudence, affordability and sustainability. And keep your hand up if you think all those charged with agreeing them really understand this complex area.

There is so much more than can be done by looking to the balance sheet and the relationship between PPE, borrowing, the Capital Financing Requirement and the revaluation and capital adjustment accounts. But that’s a whole new subject.

Dan Bates works with Pixel Financial Management on fairer funding and financial resilience. He was until recently Director of Corporate Services at Lancaster City Council.

David Chefneux

Although the Prudential Code was introduced back in 2004, the key words of prudence, affordability and sustainability mean more now than they ever did.

Councils, police and crime commissioners and fire authorities will have now set budgets for 2020-21. Whilst “balanced” budgets for next year may well have helped to ease some of the more immediate pressures around financial planning, concerns still abound  in terms of future demands on public sector services, financial resilience and long-term sustainability.

Moves towards a more “commercial” approach will have undoubtedly eased some pressures in certain areas, but the potential risks of such approaches need to be carefully considered and evaluated, as do the risks of doing nothing.

Concerns over financial sustainability have arguably been around for decades. To have survived for so long is testimony to the strength of depth, quality and experience that remains committed within the sector, despite the challenges faced for so long.

Refocus

Attention, therefore, re-focuses retrospectively to the 2019-20 outturn and then forward-looking to the next stage of medium-term financial plans.

Once budgets are set for 2020-21, the focus has to be on under-pinning the financial certainty of local government and whilst this may include a further element of investment (e.g. housing, commercial property and joint ventures) to support future income streams, the focus also needs to be placed on longer-term financial settlements. 

Data from the Ministry Housing, Communities and Local Government (MHCLG) indicates that local authorities had circa £40bn of investment balances collectively at last year-end.

Clarification

Access to such balances to support revenue positions alongside opportunities to borrow for capital investment at low rates of interest (in the current environment) provide some options in the short-term, but one-year grant settlements, uncertainty around formula funding reviews, local taxation and funding streams for particular projects all have to be clarified urgently if the future of local government services is to be maintained on a sustainable level.

Governments, MHCLG, CIPFA, stakeholders and practitioners must all have a part to play. 

Although the Prudential Code was introduced back in 2004, the key words of prudence, affordability and sustainability mean more now than they ever did.

David Chefneux is director of Link Market Services at Link Asset Services.

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