Radical change in local government funding


By Alison Scott – CIPFA Assistant Director

A huge amount of radical change is afoot in the world of local government funding. The changes to support for council tax and localisation of non domestic rates will have a profound effect on local authority finances and the level of funding risk that individual authorities will face. This article aims to give readers an overview of the proposed changes and some of the actions local authorities should be taking now to prepare for the change.

As a result of the Welfare Reform Act 2012, local authorities are developing individual schemes of council tax support to replace the previously centrally funded system with a large number currently being out to consultation. The government has set broad criteria within which local authorities must operate, most critical a requirement that pensioners are protected from any changes. The challenge to local authorities on the implementation of new schemes has been increased by the addition of  a 10% cut in the available funding. Local schemes must be approved by 31 January 2013 to apply for 2013/14.  If a local authority fails to agree a local scheme then it will be required to implement the default scheme, issued by DCLG and based upon the previous council tax benefit scheme. Given the 10% reduction in funding, failing to agree a scheme will result in an additional burden for the council.

The impact of council tax discounts will need to be taken into account when billing authorities set their tax bases. If all other things remained equal the impact of the smaller tax base would increase council tax levels across all tiers of local government. To avoid this the government will include an allowance within the localised element of business rates for the previous costs of council tax benefit, less the required cut.  For police authorities which will not be subject to local retention of business rates the additional resources will be built into police grant. How parish councils will be dealt with under the new system is still to be determined and remains the key outstanding decision required prior to implementation.

In order to set their tax bases, councils will need to estimate what next year’s council tax bills and hence discounts will be in order to forecast the total cost of discounts.  If the level of claimants changes during the year the additional cost or saving from council tax support will fall initially on the collection fund and feed through into a deficit or surplus that will be shared between the billing and precepting authorities. The actual council tax will remain fixed for the financial year.

The recent consultation issued by the Department for Communities and Local Government (DCLG)  has given much of the final detail needed to implement the changes proposed by the Local Government Finance Bill. The bill itself is due to go to Report Stage in the House of Lords on 10 October with the aim of obtaining royal assent during 2012. Under the proposals for localisation of non domestic rates, fifty percent of business rates will be localised through a system of top-ups and tariffs. The other fifty percent will be distributed via revenue support grant, allowing local authority allocations to be scaled back year on year in line with national spending totals.

Top-up and tariffs are set so that a local authority will start with the same resources under the new system as it would have had under the old. This fixes an index-linked amount to be paid by high yield authorities and distributed to low yield authorities. This gives top-up authorities a guaranteed increase in part of their resources and means that a tariff authority will lose resources unless it ensures its non-domestic rates (NDR) growth keeps pace with inflation. Because of the distribution of local shares of business rates between tiers all upper tier authorities will be top-up authorities. Police authorities are outside of the scheme for local retention of business rates.

In addition to the top-up and tariffs there will be a levy on 'disproportionate growth' which will be used to provide a safety net for those authorities experiencing significant falls in business rates. A reset mechanism will be in place with an initial rest period of seven years so that future proposed 10 year resets fit into the Comprehensive Spending Review process. 'Economic action zones' and large pre-agreed tax increment financing schemes are to be excluded from the reset mechanism and the levy. Local authorities are free to come together to form pools for NDR purposes. Where local authorities enter into pooling arrangement individual top-ups and tariffs will be combined as will levy arrangements. Authorities in pooling arrangements will need to agree how they will share risks and potential rewards between them.

The changes will increase the level of instability in the forecast of resources and the interaction of both with economic growth will increase the associated risks. As an example the decline of a major industry could result in both a decline in the business rate base and an increase in council tax support demand. Local authorities will need to take all of this into account to estimate potential future business rates growth and demand for council tax support.  Any changes during the year in the level of business rates or council tax benefit will fall initially upon the collection fund. There is likely to be increased instability within the collection fund as a result of the changes and the level of surpluses and deficits is likely to rise.

Because of the direct impact on resources and therefore reserves it is vital that local authorities are preparing in earnest for the new system. There are five key steps that every local authority should be taking now:

1. Understand the changes

There are a huge amount of changes suggested in the Local Government Finance Bill. The detail that supports these new regulations is still being discussed. It is essential that individual councils are aware of the implications of the changes and the pace of change. Keeping up to date involves accessing the right information from the web and having regular conversation with those around you. Virtual discussions are also highly influential and many of these are taking place in forums both on a regional and national level. The conversations are taking place at all levels so it is essential that strategic discussions do not take place in isolation of the operational considerations.


2. Finance and revenues working closely together

The relationship between finance officers and revenue managers will be central to the smooth running of a local authority budget. Both parties need to be aware of each others timescales, constraints and requirements. For example, finance teams will want to know the details held regarding business rates appeals in order to place contingencies within the budget. The lack of local authority control around this area of budgetary responsibility will almost certainly make even the most robust of accountants a little nervous. Similarly accountants need to explain the operational implications between the collection fund and general fund balances so that revenues officers understand the impact and timing of their decisions.

3. Exploration of options

In an era when all things are possible, option appraisal will be the way forward.  What are the options available for delivery of the scheme, how can savings be made and how can financial risk be minimised.  Pooling provides a real opportunity, where it bring together top-up and tariff authorities together, to retain growth locally but its complications should not be underestimated. The final solutions will be as varied as the discussions taking place and will be influenced amongst other things by appetite for risk, the operation of tariff or top up  and the political ambition of the leadership.

4. Modelling

As part of the options appraisal Local authorities or groups of Local authorities will be coming together to look at the scenarios that could occur. Modelling will be an essential part of the process of decision making allowing organisation to run various simulation of how changes in funding will impact on their income streams. Modelling tools will help guide and influence the decisions made at a strategic level. The local information and data needed to ensure accuracy in these models will be supplied by the organisations themselves so consideration need to be given to what data is available and what would be needed in the future. What goes into a model was the subject of a number of the highly successful CIPFA events held in May 2012 when 240 delegates shared their thoughts and comments on what makes a good model.


5. Forecasting

The new scheme brings with it not only increased opportunity for rewards but also increased financial risk should forecasts be inaccurate. Finance staff will be looking to revenues managers for confidence in data and figures that are being supplied. This presents a huge challenge for the revenues team as the volatility within this area and the impact of factors beyond the control of the local authority will have implications at every stage. Revenues staff may have to take time to explain the relationship and role of the valuation officer so that there is clarity on what degree of accuracy can be achieved.

Alongside the operational implementation of the new local government resource regime there will also be an impact on the way we account for non domestic rates in particular. CIPFA is well aware of practitioners desire for early advice and is currently working on guidance as so that local authorities have access to the principles of how the new system will work well in advance of its implementation.

There is no doubt that the new world of local government presents its challenges but, given the huge effort from both the sector and officials within DCLG to get to the point we are currently at, there is optimism that it will also be seen as a real opportunity in the longer term to reinvigorate local governments resource base.