CIPFA signals five warning signs of council financial stress

06-07-2017

The Chartered Institute for Public Finance and Accountancy (CIPFA) is calling on councils to watch for five warning signs of financial stress and to build resilience into all aspects of planning and operations, with the launch of its new report Building Financial Resilience.

Whether the June General Election result heralds a softening of austerity as we know it, local government financial pressures are mounting, and CIPFA’s snapshot survey of English local authority chief financial officer confidence to deliver public services revealed serious spending pressures.

Through its work with council financial teams, CIPFA has identified five key symptoms of financial stress:

 ·         A rapid decline in reserves – using reserves to avoid cuts will only provide temporary relief

  • A failure to plan and deliver savings in service provision, so that councils are not living within their resources
  • Shortening of medium-term financial planning – a failure to plan ahead could indicate a lack of strategic thinking and an unwillingness to confront tough decisions
  • Firm objectives missing from savings plan, such as a saving plan with ‘still to be found’ gaps or consisting of targets rather than robust plans; this may also include a tendency for over optimism in timing and scale of savings
  • Tendency for unplanned overspends – carrying forward undelivered savings into the following year only creates the need for greater cuts in subsequent years.

Sean Nolan, Director for Local Government at CIPFA, said: “In the face of growing demand, tightening funding and an increasingly complex and unpredictable financial environment, councils must be financially resilient; meaning they must remain viable, stable and effective in the medium to long term.

“Austerity has battered the sector for close to a decade, while increased demand and cost pressures have left some councils at the brink.

“Other, more positive changes, such as a trend towards greater self-sufficiency and local leadership has allowed some areas to flourish, while others have struggled to reap the benefits of these reforms.

“What we are seeking to do now is to help councils spot the warning signs of financial stress and take the right steps towards resilience.”

CIPFA’s new report on local government financial resilience, Building Financial Resilience, not only identifies the warning signs, but outlines the steps towards building better financial resilience.

Financial resilience is about a council planning appropriately for the future and protecting itself against unexpected shocks. CIPFA is working with councils to ensure they have four of essential ingredients to resilience in place:

 

  1. Ensuring the right financial management systems are working effectively is key. Everyone from the CFO and senior management team to the political leadership must understand the financial strategy and have a clear appreciation of the financial position.
  2. Use of benchmarking data is essential, this should include comparing costs, income and activity levels with similar authorities.
  3. Each authority needs a single, consolidated, living document that tracks its saving plans – including what has been agreed and how much progress has been made.
  4. Managing reserves effectively – use of reserves to manage a savings programme over the medium term can be very sensible, but councils should avoid dipping in to reserves to pay for services or postpone necessary cuts.

ENDS