By Milan Palmer, Policy Officer, CIPFA Policy and Technical
Local authorities have been under pressure for a long time and the statistics do not paint a pretty picture. According to the Local Government Association between 2010 to 2020, local authorities will have had their core funding reduction of nearly £16 billion pounds, a loss of 60p in every £1. Ministry of Housing, Communities and Local Government data shows expenditure on commercial trading services rose from £323m in 2014/15 to £2.9bn in 2017/18 with the government report stating “a large part of this increase is a result of a rise in expenditure on acquisition of land and existing buildings”. At the same time, local authority treasury management should be focused on the security of public funds which can be achieved by following the Prudential and Treasury Management code produced by CIPFA.
There is no doubt that budgets are being stretched. It is understandable that councils are finding innovative ways of raising funds, although innovative fundraising in itself shouldn’t mean undue risk for public funds being taken. There is some evidence to indicate that councils are also overexposed to retail investments.
According to economic research firm Capital Economics, shopping centre investments are set to see a 10% drop in capital value. It also stated that the evidence highlights shopping centres are facing rising vacancy and management costs with nothing on the horizon suggesting this is about to change.
It is not just retail space though which is prone to problems. A leading auditor identified several significant problems with a substantial asset purchase in 2016. These included, significant weaknesses in the financial process during the purchase, little evidence legal advice was properly considered, as well as being unable to determine whether the council had considered the financial impact if the primary tenant decided not to renew or change the terms of its lease, as well as departures from the financial guidance provided by CIPFA.
The auditor said “as significant loan costs still need to be met for up to 50 years, we would have expected to see projections analysing the position under different scenarios”. The council themselves say they have “become heavily reliant on investment income” to fund the services it provides.
Though it is not all doom and gloom. There is opportunity to translate these risks in to positives but to do this it requires a new approach relevant to the problems councils today are facing. Our upcoming policy briefing addresses commericialism and public service provision on 11 June in London.
Hear from Nick Tustian, Chief Executive of Eastleigh Council who has faced these problems head on and progressed over the hurdles, to use the commercial approach to delivering public services in their favour. Paul O’Brien, Chief Executive of the Association of Public Sector Excellence, will outline how public services and be improved with a commercial approach while warning of the risks, as well as Alix Bedford from our event sponsor Zurich Municipal will give a talk on turning the risks in to positives with effective management.