By Rob Whiteman CBE, CIPFA CEO
Councils are facing a staggering array of competing challenges and priorities that are placing pressure on their finances.
Short-term cash injections, the upcoming Budget, and the chancellor’s determination to end austerity may go some way towards alleviating some immediate pressures. But, just as a plaster will not heal a substantial wound, short-term measures are not enough to offset the ramifications of a decade of austerity.
With money scarce and demand rising, it is important for local authorities to employ good management of their limited resources, ensure that financial stressors are understood and contained and that vital services are delivered to residents up and down the country.
While local authorities are generally pretty good at this, in the current climate, good public financial management is no easy task. It requires robust data and the appropriate expertise to interpret and understand the evidence.
This is why CIPFA created the Financial Resilience Index (the Index). Understanding an organisation’s ability to remain stable, or not, in the event of financial shock is key to good decision making. The Index is designed with chief financial officers in mind, allowing them to develop a clearer understanding of possible areas of financial risk that could impact upon their authority’s financial resilience.
The Index brings together a series of nine indicators (eight for those without social care responsibilities) drawn from publicly available, but separate, data sources.
Indicators range from the explicitly financial, such as levels of reserves and amount of external debt, to more qualitative measures. For example, the Index includes the authority’s children’s social care judgement from Ofsted. The potential financial risk being that authorities requiring improvement will likely have higher imminent costs in this area than those that are delivering a service rated as good.
Together, these measures are intended to provide a rounded picture of an authority’s resilience and to ensure the sector is held to collective and robust standards of governance and financial management.
For the most part, the picture is positive. The evidence supports our belief that local authorities, by and large, maintain a solid financial position despite the challenges that they’ve faced over the last ten years. However there are some authorities where, for one reason or another, there are signs of potential financial risk.
The word 'potential' is important here. It is vital to note that the Index is not a predictive model. Think of it like WebMD. While WebMD may be a useful resource detailing symptoms and their possible severity, it contains a vital disclaimer that it is not a substitute for professional diagnosis or treatment. Just as one should not self-diagnose illness without the intervention of a healthcare professional, the experts in diagnosing the risks highlighted by the Index are those working within local authorities.
Data requires interpretation, and only individual councils are able to provide the local narrative and context to understand what the raw figures mean for their area. In short, while CIPFA can list the symptoms of potential financial risk, local authorities are the doctors who can determine the severity of the problem.
That isn’t to say that the tool provides no contextual information at all. The Index is a comparative tool and allows local authorities to benchmark themselves against their peers – either against councils of the same type (eg county councils/unitary authorities), or against their nearest statistical neighbour.
An accessible way to benchmark against peers supports CFOs in discussions around their organisation’s financial position with both elected members and the rest of the authority, and can aid consultation processes around financial decision making with local residents. On the reverse side, the platform allows elected members to ask informed questions about the advice they’re receiving from officers, and allows the public to interrogate decisions being made on their behalf.
Public and political scrutiny is having a moment following the election. Only this month, Boris Johnson’s government was criticised for only allowing certain members of the press into a briefing on Brexit. Trust in the public sector is at an all-time low, and is not helped by the notion that our public institutions are hiding from legitimate scrutiny. We hope that the Index will not only support good financial management and decision making, but also increase access to vital information at a time when the public sector is in need of more scrutiny, not less.
This article first appeared in Government Business Magazine.