Financial Sustainability of Local Authorities


By Neil Sellstrom, CIPFA Pensions and Treasury Management Advisor

In June 2016 the National Audit Office (NAO) published its report to the Department for Communities and Local Government (DCLG) into the financial sustainability of local authorities: capital financing and resourcing. Since the demise of the Audit Commission this is the first report providing a national perspective on the state of the financial health of local authorities and given the significant reduction in funding its couldn’t be more timely. Previous reports have identified a 25% fall in real terms revenue income from 2010-11 to 2015-16.

This report considers the capital spending and resource implications over the same period and has some expected and more surprising findings. Despite the fall in revenue resources, capital grants over the same period actually increased albeit by 0.2% and the use of other capital resources such as capital receipts has also increased.

As you might the major issue around capital financing has been minimising the impact on revenue spending. The report is complimentary of the approaches taken by authorities using prudent treasury management strategies to minimise external borrowing and reviewing MRP (Minimum Revenue Provision). The use of internal borrowing has avoided revenue interest payments and minimised investment cash balances.

The use of internal borrowing is a sensible strategy and while interest rates set to remain at historic lows it appears time is on our side. However, the exposure to interest rate risk should not be ignored as this borrowing will probably need to be externalised at some stage and given the fact long term borrowing has never been cheaper some authorities are now considering moving into the markets.

Overall debt serving costs have increased as a proportion of total revenue spending which is due to the significant fall in revenue expenditure. Debt serving costs themselves have also fallen by 4.3% but with total revenue spending down almost 15% the proportion is naturally greater. Between 2010-11 and 2014-15 capital spending actually increased 5.3% in real terms but the picture across the country was far from consistent with around a half of authorities reducing capital expenditure during the period. Those authorities with the greatest reduction in revenue income are more likely to have seen a fall in capital spending. 

The report also looks at the role of DCLG in overseeing the systems in place to ensure sustainability and overall concludes that ‘assurance’ can be taken from the capital framework based upon CIPFA’s Prudential Code. However, there are areas where DCLG can improve performance particularly around identifying issues and trends in the sector.

Concerns are raised that with the inevitable focus on short-term revenue pressures some decisions such as changing MRP policies and reducing maintenance programmes may not prove to be prudent decisions in the longer term.

In order to help the sector and DCLG, CIPFA re-launched its National Treasury Risk Study on 30 September 2016. Aimed at all local authorities the Risk Study provides objective quantification of an authority’s treasury position set against the best practice CIPFA treasury risk framework. The analysis is carried out based on portfolio positioning, the latest balance sheet position and projected spending plans.

The results are provided to each authority free of charge and will set individual positions and risk strategies against participating peers. The universe of results will also be shared with DCLG to aide with their identification of long term trends within the sector. CIPFA is encouraging all authorities to participate to enhance their own decision making and benefit all stakeholders in the sector.

Discover more