Austerity has placed the finances of local authorities under extraordinary pressure. Against a backdrop of tight resources, there is much local government can do to weather the storm, say Phil Woolley (Partner, Grant Thornton, Public Services Insight and Consulting Practice), and John O’Halloran (CIPFA, Director, Consultancy).
Local authorities have absorbed funding cuts on an unprecedented scale, while demand has soared. What has this meant for financial management?
Phil Woolley: There has been a narrative change towards a more corporate focus, greater transparency and accountability. However, often the reality is that smaller back office budgets have reduced the resources available to manage finance and maintain a robust control environment. In some councils this is leading to significant overspends, particularly in demand-led services such as children’s and adults' social care.
Consequently, we have seen councils centralise their financial management, rather than embedding finance professionals in services. Generally, this has led to an improvement in the financial literacy of budget holders in the services now having to engage more directly in budget issues. But it has become more difficult for corporate financial managers to develop the detailed knowledge of the service, which is an important component of an effective system of control. Internal audit is another area that has been cut back, with the result that there can be less scrutiny on the effectiveness of controls.
John O’Halloran: Funding cuts have certainly resulted in the creation of more business partners from finance and other central services to get closer to the service departments. Where finance in local government works well is when organisations see financial management as the responsibility of the whole operation, and not just the accountants. A common understanding and ownership of issues is crucial so that financial management isn’t imposed from the financial and corporate centre. This means that even when there are difficulties to be resolved, the issues are owned by the whole organisation.
PW: Finance must show leadership in taking that approach. Members of the leadership team, particularly those in demand-led service areas, must understand the consequences of their potential overspends. Sharing that wider story across the whole organisation underpins a collaborative approach that underpins Foresight.
How would you describe the overall standard of financial management in local government? Is it as good as it could be?
JO: The best way to describe the overall standard of financial management is patchy. Where organisations aren’t working as well as they could, that is partly down to a lack of expertise and skills, and skills shortages in particular. But there’s certainly not one model throughout the whole of local government.
PW: The quality of planning is much better, with more stringent evaluation of assumptions and the use of scenarios over a longer horizon. However there is room for improvement.
Corporate teams have become better at setting aside budgeted contingencies, and employing other methods to compensate for demand-led overspends on the financial trajectory of the whole organisation. However, there are some areas where controls and financial planning are pretty weak.
Some authorities are still relying on short-term financial fixes and the last few years have seen an increase in the use of reserves, either on the assumption that corporate finance will find a fix, or that recent additions for adult social care funding such as the Better Care Fund and winter pressures will be permanent. But overall, there has been a surprising lack of genuine transformation in some quarters and still a big focus on top-slicing budgets.
What are the common success factors you see?
PW: Success hinges on longer term planning, anticipating and planning for demand pressures, having a clear understanding of service delivery objectives and priorities and bringing all of these factors together with financial strategy. To do this you need finance teams that are knowledgeable, can demonstrate leadership, and have the right balance of skills and capacity.
But it’s also about having a healthy and positive corporate culture within the services, and a focus on prioritising resources around outcomes for residents, rather than just a story of cuts.
JO: Those authorities taking short-term views and top-slicing individual service budgets are the ones storing up trouble for the future in the current climate. A more successful approach is where the corporate entity, the management team and the members jointly own and understand the corporate financial management position of the authority and they plan and deliver services accordingly.
Transparency and leadership are all critical. Members and officers working together to a common aim is vital. And having sufficient expertise and training outside of finance itself in the service departments, so there’s that common understanding.
For example, non-finance people can move up in a service department without necessarily having exposure to corporate financial management and how it works across the board and not just in their own area.
What are the barriers to improvement?
PW: There are some structural and funding challenges which make holistic and longer term financial planning difficult. Where councils are uncertain of this longevity of material funding streams and the outcome of the fair funding review, modelling robust projects becomes challenging. Within councils a failure to establish a clear alignment between priority service outcomes and financial resources, without strong member support and ownership, is a barrier to applying strong financial management consistently.
JO: The information that’s given to members varies massively. And this is crucial because members need to own the problem as much as the management team and the section 151 officer.
But often information they need in order to do this is not made available to them. Hence, there is a role for elected members in financial management, just as NEDs in the private sector get training in financial management.
How can local authorities overcome barriers and ensure their financial management is fit for the future?
PW: Finance teams must establish a clear narrative on financial strategy across the leadership team – setting out potential future scenarios, clear financial objectives, priority outcome areas; and, from this, work up a clearly collaborative programme of remedies and interventions to effect the necessary change at the service level to enable delivery within available resources.
Where the financial strategy requires a high degree of change and transformation, the financial management and monitoring of that change is really important. And that’s where there are real capacity and skills shortages.
Councils must build a shared narrative, forecast a range of outcomes based on clear evidence and robust data, understand current benchmark performance and areas for potential savings. They must also develop growth strategies to drive income, and financial recovery and cost reduction programmes for those areas deemed as requiring stronger financial management.
This piece also appeared in GT and CIPFA’s Financial Foresight report.
To explore this subject more download CIPFA’s recent thought piece ‘Talking about tomorrow’.