By Andrew Burns, Associate Director, CIPFA
After a decade of austerity, the chancellor’s recent Spending Round sent a strong signal to the public sector that the funding tide has finally turned.
While the NHS, councils grappling with social care issues, primary and secondary schools and police forces were awarded some of the funding they desperately need, the UK’s fiscal and economic outlook sparks concern over the viability of this spending approach.
Ongoing political uncertainty is likely to mean that the long-term solutions local government has been waiting for – business rate localisation and the delayed social care white paper – are unlikely to materialise. Instead, short-term funding announcements and temporary fixes are expected to follow.
CIPFA’s view is that local authorities must keep a focus on medium-term sustainability and financial resilience. But national government still needs to decide on the role of local government – its purpose and functions – and then fund it adequately.
Even with the chancellor’s recent announcement, further devolution proposals may (or may not) emerge after Brexit and the next general election. Whatever happens, those of us in public finance need to ask ourselves how we can ensure financial sustainability and shape successful local services?
In CIPFA’s Talking about tomorrow report, we set out three pillars that are key to putting local services on the right path going forward.
The first pillar is visionary leadership. Political leaders must be able to craft a vision of a successful and sustainable place and secure support from local communities.
The relationship between officers and elected members is key to delivering a strong and viable vision over which an authority as a whole can have ownership.
To be successful, councils need a genuine culture of communication, collaboration and ownership across all political and managerial functions.
Developing and delivering a successful vision requires the courage and expertise to make difficult decisions. It can’t be said enough how integral strong relationships are for this type of strategic decision-making.
The role of the Chief Finance Officer (Section 151 Officer) is critical. A 2019 NAO survey highlighted concerns that 151s feel over the strength of their status, with those not reporting directly to their CEO feeling less able to give unfettered advice and to speak truth to power.
CIPFA’s statement on the role of the CFO in local government is clear that, in order to provide adequate advice and assurance to their organisations, the CFO must have a seat at the top table – including reporting lines into the chief executive.
It is also concerning that CIPFA’s 2018 ethics survey highlighted that 57% of accountants working in the public sector have felt under pressure to act unethically. In many cases this meant being asked to support overly optimistic budget forecasts, bypass regulations or downplay risks.
As councils come under increasing pressure to make difficult decisions, sound governance arrangements are vital to ensuring organisational objectives are met.
The second pillar surrounds financial management and resilience. Councils face the challenge of reshaping the services of the future within an increasingly complex financial environment characterised by rising demand and changes in public expectations.
In general, local government demonstrates good financial management with a track record of delivering innovation and value for money. CIPFA is working to maintain standards and spread good practice shown by the majority to the few councils where arrangements are less resilient.
For example, CIPFA’s upcoming Financial Resilience Index will provide insight into authorities’ financial stability and future risks. While most are currently stable, up to 15% are showing signs of potential strain. The Index, due to be published later this year, is designed to support section 151 officers and should be a call for action for the sector as a whole.
But this is not the only tool CIPFA are launching to support the sector. This month, CIPFA will launch a Financial Management (FM) Code, designed to support good practice in financial management and help local authorities demonstrate financial sustainability.
This code will represent the first set of financial management standards for local authorities in the UK.
Based on principles rather than prescription, the code aims to help councils manage their finances over the short, medium and long terms, increase financial resilience and cope with unexpected shocks to financial circumstances.
It builds on a substantial existing framework of statutory rules, including codes for accounting, borrowing, capital strategies and treasury management.
Councils are increasing turning to borrowing for commercial investment in response to cuts in government funding. However, this course of action may store up risk for the future and divert authorities away from their core mission.
In response, CIPFA has provided further clarification on the Prudential Code, to curb investment into commercial property that has a high level of associated risk. The aim is to make sure that borrowing is safe and affordable, and limit authorities’ exposure to too much risk.
It’s imperative that councils consider the risks implicit with reliance on commercial income. If commercial activity is undertaken purely to raise income, an extra degree of governance and transparency is needed, with independent advice required to ensure deals are sound.
Should a council borrow purely to fund commercial activity, its investment strategy should explain why statutory guidance has been disregarded, how the money will be used and what procedures are in place if the expected investment yield misses estimates.
The next iteration of the Resilience Index, due to be published in December 2019, is designed to support Section 151 Officers with comparative information based on trusted sources and should be a call for action for the sector as a whole. This tool gives greater visibility to councils which can be used to help improve their financial positions.
The final pillar focuses on future value and assurance. Future services will be delivered within an increasingly complex public sector architecture involving pooled budgets, shared services, outsourcing, commercial services and potential further devolution.
These complex delivery arrangements can cloud accountability. Effective governance arrangements are more critical than ever to scrutinise progress, quality and value for money.
In practice, this means:
- Being more open and transparent, without hiding behind the cloak of commercial confidentiality.
- Improved oversight and scrutiny, even when it proves politically difficult for the controlling administration.
- More effective audit, both internal and external, even if that leads to reputational issues locally.
To improve both the state of public finances and outcomes for the citizens we serve, we need better aligned local public services; multi-agency, integrated and preventive approaches that are shaped around local needs and assets. The best way to facilitate this change is to adequately fund local government and let democratically elected leaders decide on local priorities. A strategy that consists of throwing isolated pots of money on individual service areas is not effective and will not serve to benefit local communities.
These are all important pieces within a broader integrated and comprehensive approach to building trust in public financial management and governance. It’s only by tackling structural and funding issues from all angles, and all levels of government, that local authorities will be better positioned for the future.
This article first appeared in the MJ.