Mike O'Donnell: the risks of action are less than the risks of inaction


By Mike O'Donnell, Associate Director of Local Government, CIPFA

It was when Northamptonshire County Council issued its first section 114 notice that the penny finally began to drop in the political and public mind that the local government sector is facing a deepening and immediate financial crisis. This second 114 notice must hammer that message home, particularly given the scale of the financial problem at the county council has proved to be significantly larger than first thought.

Indeed, in recent months, report after report has demonstrated how councils are struggling to survive and that the risk is mounting. According to the NAO’s most recent financial sustainability report, 10% of upper-tier authorities are vulnerable to financial failure. That could be more than twenty councils at risk, along with the essential services for literally millions of tax paying citizens. 

The findings of these reports and dawning realisation of the cash crisis in Northants is that the issue can no longer be ignored. Local leaders must seize the opportunity, whilst there still is one, to take action to ensure the sector is put on more sustainable footing. Otherwise, we will likely see more local authorities buckle under the financial strain.

CIPFA is working hard to support local leaders address the challenge by providing them with appropriate support. Currently this support is three-fold. 

We are developing a new financial management code, to sit alongside established treasury management and prudential codes, which aims to support good practice in the planning and execution of sustainable finances. We will also continue to share practical advice on funding and resource management via CIPFA’s Funding Advisory Service. Finally, via its new index, CIPFA will provide stakeholders with impartial information on how financially resilient individual councils are and what pressures they need to pay attention to.

The introduction of a financial management code at our CIPFA conference in July has been warmly welcomed by the sector, including MHCLG’s Local Government Minister, Rishi Sunak, at the conference.

With regards to the index, CIPFA is currently consulting on its design and methodology.  And, as responses emerge, it feels an opportune moment to address the standout concerns being voiced to us directly and in the press.

The proposal for the index to use a ‘traffic-light’ grading system is a concept that some are finding challenging, and there is concern that it will be an exercise in ‘naming and shaming’. Naming and shaming is not CIPFA’s intention at all. It is, however, our intention to provide an early warning system for local authorities with deteriorating financial positions and thereby to prompt action where it is needed.  

Furthermore, by sharing this information publicly, there will be more pressure on councils to respond swiftly and effectively. And, in circumstances where there is a reluctance from some parts of a council’s leadership to address emerging financial problems, a public index will also serve to strengthen the arm of the s151 officer to ensure such problems are flagged at an early stage - rather than let the position get to and past the point of no return in terms of financial sustainability.

Indeed, the reality of Northamptonshire’s position as it has now emerged should be warning enough that burying our head in the sands just won’t wash any more. Local authorities are anything but complacent, but, nevertheless, we need to keep smelling the coffee. As JFK noted, "There are risks and costs to action. But they are far less than the long range risks of comfortable inaction."

One is tempted to muse that the level of systematic failure in Northamptonshire might have been picked up, before its own demise, by the Audit Commission. And like the Audit Commission’s data, the data for CIPFA’s index is intended to be objective, independent and impartial.

To give those running and those served by local authorities a clear understanding of their level of financial stress and what their main pressures are, CIPFA will use a range of indicators. These indicators include, the level of resources, the rate of depletion of resources, social service demand pressures, the level of borrowing and auditors’ VFM assessments.

CIPFA has chosen these indicators because we believe, based on our experience advising the sector, they will paint an accurate and detailed picture of financial risk. The proposals are still subject to consultation, so if there are additional or better indicators, then these can be incorporated.

We have designed a wide-ranging and open consultation with ample opportunity for feedback so we are able to respond, in a timely fashion, to any suggestions on the methodology and design of the index, and so I urge interested parties to share their views so that we can work together to create a tool that has real and meaningful impact.

CIPFA has no agenda behind the index, other than to be genuinely helpful by identifying risk, to provide objective context to decision makers and the opportunity for 151 officers (who are accountable to the public, remember) to challenge the insidious tendency towards optimism bias that led to Northamptonshire’s demise. While such transparency may be uncomfortable, it is hard to argue against it in principle. How we do it in practice we can work on together. 

Article first appeared in LGC.

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