CIPFA_Intro_LGF

Preface

The continuing political uncertainty since the referendum vote to leave the EU has had important implications for local government. The future trajectory of government policy remains unclear, so the challenge of rendering local government services financially sustainable remains to be addressed. This challenge is becoming more difficult with the increasing pressures of health and social care and the lack of political consensus on a way forward. In 2018 the financial failure of Northamptonshire County Council made this issue headline news. An understanding of local government finance remains essential to understand these important policy debates. This understanding will be supplied by reading this publication.

Chapter 1

A brief introduction to
local government

Local government in England is a patchwork of different types of council. There is a mixture of single-tier councils, in which one council provides all the services for an area, and two-tier councils, in which these services are shared between two councils, known as an upper-tier council and a lower-tier council. In addition, police and fire services also come within the local government sector.

Greater devolution in England has seen an increase in the number of combined authorities. The Greater Manchester Combined Authority (GMCA) was at the forefront of this change but further devolution has followed, including the devolution of health and social care in London from 2017.

In Wales, there is only a single tier of local government, plus police and fire services.

As well as the principal local authorities, in many areas of England and Wales there are also local councils. These may be parish, town or community councils, which provide a much smaller number of services within a small local area.

The following table illustrates the local government structure for single- and two-tier areas in England and Wales. In some areas of England there are also combined authorities.

Table 1.1: Local government structure in England and Wales

England outside London		London	Wales
County councils	Metropolitan councils and unitary councils	Greater London Authority	Unitary councils
District and borough councils		London borough councils
Police and fire authorities*

* Police services are provided by the Greater London Authority (GLA) in London and fire services are still the responsibility of some upper-tier authorities.

Source: CIPFA

Councils provide a whole range of services, with responsibility split between upper- and lower-tier councils in two-tier areas. The table below shows some of the services provided by local government and highlights which tier has responsibility for them in two-tier areas. Councils do, however, work increasingly in partnership with each other and while an individual council will retain responsibility for provision of services, other councils or organisations may provide these on its behalf. Combined authorities are an example of how this can be done. The drivers behind this are better use of resources and improved provision for the customer.

Table 1.2: Some services provides by local government

Upper tier

Lower tier

Education

Highways*

Country parks and footpaths

Economic regeneration*

Concessionary fares and public transport*

Social care

Libraries

Trading standards

Waste disposal

Planning strategy*

Registrars

Public health

Housing

Waste collection

Environmental health

Parks

Markets and town centres

Planning

Street cleaning

Museums and leisure centres

Economic regeneration

Parking

* Provided by the GLA in London, which also has responsibility for police and fire services.

Source: CIPFA

Councils currently receive funding for the services they provide from local residents and businesses through council tax and non-domestic rates (also known as business rates) and from central government through grants for specific purposes and Revenue Support Grant for general purposes. Central government issues regulations on how councils raise and spend money to provide services. These are described in more detail in the following chapters.

The devolution agenda has seen a rise in the debate around tax-raising powers with many councils wanting fiscal control to move away from Whitehall, although there has been some devolution of business rate income in England the current system is still highly centralised.

Finally it should be noted that the financial year for all councils is 1 April to 31 March.

Chapter 2

The revenue budget
and resources

the Revenue Budget

The revenue budget is the term used to describe the amount that a council spends on its day-to-day running of services. This includes wages and salaries, property and transport running costs and payments to suppliers.

In addition to the running costs of services, councils have to fund the costs of borrowing money to pay for their capital assets. Councils also need to meet the costs of certain other local service providers, such as the Environment Agency for flood prevention work, through what are known as levies. Once all these things are taken into account, along with specific grants, a figure known as ‘net revenue expenditure’ is reached.

The money a council spends on investing in new buildings, infrastructure and equipment is known as the capital budget and is covered later in this guide.

Local Authority Revenue Expenditure and Financing England: 2016 to 2017 Final Outturn shows how this expenditure is allocated across local government services.

Figure 2.1: Proportion of total net expenditure by service, England, 2016/17

(a) Housing benefit includes mandatory rent allowances and rent rebates and non-mandatory housing benefit payments.

(b) ‘Other’ includes ‘highways and transport’, ‘public health’, ‘fire and rescue’, ‘central services’, ‘other services’ and ‘precepts, levies, trading accounts and adjustments’ excluding housing benefit.

Source: Local Authority Revenue Expenditure and Financing: 2016-17 Final Outturn, England

Figure 2.2: Financing of revenue expenditure, England, 2016/17

* ‘Government grants’ includes ‘Local Services Support Grant (LSSG)’, ‘Specific grants inside Aggregate External Finance (AEF)’, ‘Revenue Support Grant’ and ‘Police Grant’. Since 2013/14 these specific grants inside AEF have included Public Health Grant, Local Council Tax Support Grant and the central share of non-domestic rates.

Specific Grants

Councils receive a number of specific grants from central government to support government priorities. The table below sets out income from the five largest specific grants in England. The trend is to move away from specific grants and include funding in the main settlement which can be spent according to local priorities.

Table 2.1: Main specific grants – England, 2016/17

Grants inside aggregate external finance	�m
Dedicated Schools Grant (DSG)	26,904
Public Health Grant	3,388
Pupil Premium Grant	1,527
New Homes Bonus	1,438

Source: Local Authority Revenue Expenditure and Financing: 2016-17 Final Outturn, England

COUNCIL TAX Requirement

From the net revenue expenditure figure any use of council reserves (a topic covered later) is subtracted to get to a budget requirement figure that is then funded from general government grant, non-domestic rates and council tax.

Council Tax

Council tax is collected from residents within a council’s area based on the value of the property they live in. Council tax was introduced in 1993 to replace the community charge (or poll tax). For the purpose of council tax each property is assigned to one of eight bands, A to H, based on their value in 1991. The value of each property is assessed by the Valuation Office Agency, an agency of central government. For properties built after 1991, value is assessed as if the property had existed in 1991. Residents who do not agree with the council tax band their property has been placed in have a right of appeal.

In Wales, the property values relating to each band were reassessed and updated in 2005 based upon 2003 property values. This process is known as council tax revaluation. There has been no revaluation in England.

The band a property is placed in determines how much council tax will be paid relative to other properties in the same council area. For example, a Band A property will pay two thirds of the amount of council tax paid by a property in Band D, while a property in Band H will pay double. The following table sets out the property values that relate to each of the council tax bands and the relative amounts of council tax that will be paid.

Table 2.2: Property values and council tax bands

Band	English values	Welsh values before 2005	Welsh values from 2005	Relative council tax
A	Less than �40,000	Less than �30,000	Less than �44,000	6/9
B	�40,001 to �52,000	�30,001 to �39,000	�44,001 to �65,000	7/9
C	�52,001 to �68,000	�39,001 to �51,000	�65,001 to �91,000	8/9
D	�68,001 to �88,000	�51,001 to �66,000	�91,001 to �123,000	9/9
E	�88,001 to �120,000	�66,001 to �90,000	�123,001 to �162,000	11/9
F	�120,001 to �160,000	�90,001 to �120,000	�162,001 to �223,000	13/9
G	�160,001 to �320,000	�120,001 to �240,000	�223,001 to �324,000	15/9
H	Over �320,000	Over �240,000	Over �324,000	18/9

Source: CIPFA

The level of council tax can be reduced in certain circumstances, including:

■a discount of 25% when fewer than two people occupy a property. It should be noted that certain people are excluded when calculating the number of people in a property, including under 18s and students
■a reduction of one council tax band for people living in houses that have had disabled adaptations made to them
■discounts for those on low incomes and pensioners. Each council now has its own local scheme to determine who can apply for a discount based on income. Pensioners are protected under the national scheme.

The requirement for councils to have discount schemes for those on low income was introduced in 2013/14. Previously there was a national scheme for council tax benefit that was part of the benefits system. Since 2013/14 each billing authority has been required to deliver its own local scheme with some freedom to decide on the criteria against which people will be assessed, and because the council tax discount is converted to a percentage reduction in the council tax base (see below), it automatically makes a proportionate impact on the major and local precepts.

Council tax is collected by local billing authorities; these are unitary authorities, district councils, metropolitan councils and London boroughs. Other local authorities, including county councils, police and fire authorities and the GLA, raise money from the council tax by setting a precept which is collected on their behalf by the billing authority. The precept is the formal term given to the total amount an authority other than a billing authority wishes to raise from the council tax. This amount is converted to an amount of council tax and shown separately on bills.

Calculating the council tax

The council tax is calculated by first subtracting the amount of non-domestic rates and Revenue Support Grant that a council expects to receive from its budget requirement. An adjustment is then made for the use of reserves and the income expected from fees and charges. The balance is left to be funded by the council tax and the actual council tax is calculated by dividing this amount by the council tax base.

The council tax base is calculated by converting the number of dwellings in each band to Band D equivalents, for example each house in Band H is equivalent to two Band D houses and each Band A house is equivalent to two thirds of a Band D house. From this amount the value of any discounts is subtracted; for example, if a single person tax discount (equivalent to 25%) is awarded to four houses in the same band, this would reduce the tax base for that band by one. The following example shows a very simplified version of how this works.

Table 2.3: Council tax base calculation

Band	Number of properties	Reduction due to discounts	Adjusted number of properties	Ratio	Band D equivalent
A	3,000	1,200	1,800	6/9	1,200
B	4,000	1,300	2,700	7/9	2,100
C	6,000	1,500	4,500	8/9	4,000
D	4,500	1,000	3,500	9/9	3,500
E	3,200	500	2,700	11/9	3,300
F	1,950	150	1,800	13/9	2,600
G	1,850	50	1,800	15/9	3,000
H	920	20	900	18/9	1,800
Total					21,500

Source: CIPFA

In this example the tax base for the area is 21,500 Band D equivalents. The Band D council tax is calculated by dividing the amount to be raised from council tax by the council tax base. The council tax for other bands is then calculated by multiplying the Band D council tax by the relative ratio for each band; for example, if the Band D council tax is �900, the Band A council tax will be 6/9th (two thirds) of this amount or �600.

This calculation will be carried out by the billing authority, major preceptors and local billing authorities to come to a final council tax figure that citizens will pay. The example below shows the calculation for an area with a police and crime commissioner (PCC), a county council, a district council and a parish council. The council tax base is higher for the PCC and the county council as these cover several district council areas and lower for the parish council as there will be several within the district council area.

Table 2.4: Calculation for a PCC area

Council	Precept/amount to be collected from council tax	Tax base	Band D council tax
	�		�
County council	225,000,000	250,000	900
Police and crime commissioner	30,000,000	250,000	120
District council	4,300,000	21,500	200
Parish council	75,000	1,500	50
Total to be paid by council tax payers			1,270

Source: CIPFA

Council tax can be paid either in a lump sum or in instalments, usually by direct debit. Government regulations make payment by ten instalments the default option for payment, but from 2013/14 all residents have had the option to pay their council tax over 12 instalments rather than the traditional ten instalments.

Billing authorities are responsible for collecting council tax and paying over the major and local preceptors’ shares. They are also responsible for dealing with any arrears and taking action against non-payers, which includes the ability to make discretionary hardship payments to those genuinely struggling to meet their bills.

Council tax increases

Consecutive governments have been concerned about the level of increases in council tax and have sought to limit the amount by which council tax is allowed to increase. Initially this was done through capping under which councils were given specific limits to the amount by which their budgets could increase. This system of crude and universal capping was abolished in 1999 but the secretary of state retained reserve powers.

For England, since 2012/13, council tax referendum rules have been in place. Under these rules, if a council increases its council tax above a pre-announced percentage, that council will have to organise a referendum of council tax payers to approve the increase. The referendum limit for 2018/19 was 3%. Councils are unlikely to risk going to a referendum because this would take place after the budget setting and council tax billing processes have finished and councils would risk having to meet the cost of re-billing if tax payers vote no. However, in 2015 Bedfordshire Police asked for additional funds equivalent to 48p per week on a Band D property; this was above the referendum limit and a vote was held. The public chose to reject the tax rise.

As well as using referendums to limit council tax increases, the government has also made a grant available to those councils that implemented a council tax freeze, with eligible councils receiving grant equivalent to the income that would have been raised by a small increase in council tax; 2015/16 was the final year for the allocation of the council tax freeze grant.

Councils have had the flexibility from 2017/18 to raise more of the social care council tax levy, provided it neither exceeds 6% over the three-year period 2017/18 to 2019/20 nor 3% in any one year. In its annual Council Tax Survey, CIPFA found an average council tax increase for 2018/19 of �81.05 (5.1%) – the steepest increase in 14 years. CIPFA’s survey also identifies the significant gap between the amounts paid in different parts of the country for properties of the same value. The average Band D equivalent in the North East is now �1,799, whereas inner London is �1,194. Almost all PCCs (90%) in England, who set their own precepts, made increases of between �11.97 and the maximum allowable increase of �12.00. This was announced by the government in December 2017 as part of the police settlement for 2018/19.

The Collection Fund

Because a billing authority collects council tax on behalf of all the councils in its area, there is a need to avoid mixing up the true income due to the billing authority with income that is merely passed straight on to its preceptors. The collection fund is the way this is done. All council tax income is paid into the collection fund and the payments are made from the collection fund into the billing authorities’ individual accounts and to the major preceptors. The government does not want the income councils receive during the year to vary too significantly as this may cause problems for budgeting purposes, and so has made regulations to achieve this through the collection fund.

The amount that individual councils receive from the collection fund is fixed at the level of the precept or the amount that is projected when the council tax is set. This amount is paid out of the collection fund regardless of how much council tax is collectable during the year. If more council tax is collectable than expected, this creates a surplus on the collection fund; if less is collectable than expected, this creates a deficit on the collection fund. The surplus/deficit on the collection fund is shared out to the individual councils and preceptors in the following years and taken into account in those budget calculations.

The collection fund is also used to collect and pay out amounts related to business rates.

Business Rates

National non-domestic rates, also known as business rates, are payable by the occupants of non-domestic properties. It is based on the rateable value of the premises they occupy. Valuations are carried out by the Valuation Office Agency on a cyclical basis. The last valuation list came into existence in 2017 and listed the rateable value of all business properties. The rateable value broadly represents the annual rent the property could have been let for on the open market on a particular date, on full repairing and insuring terms. For the current rating lists, this date was set as 1 April 2015.

Councils are responsible for calculating actual rates bills and for collecting rates, and use the rateable value in working out how much businesses have to pay. The actual rate bill is calculated by applying the rate multiplier (a rate in the pound) to the rateable value and then deducting any reliefs that are applicable. The multiplier is set by the Ministry of Housing, Communities and Local Government (MHCLG) in England and by the Welsh Government in Wales.

The business multiplier for 2018/19 is:

■England = 49.3p in the pound
■small businesses in England = 48.0p in the pound
■all businesses in Wales = 51.4p in the pound.

For England, a small business is one where the total rateable value is under �51,000. For example, a property with a rateable value of �12,000 in England would have an annual rates bill of �12,000 x 0.480 = �5,760.

Some businesses may be eligible for small business relief or charitable discounts, which can affect the amount of rates they pay. In addition, billing authorities are able to grant discretionary relief to individual businesses, for example to promote town centre regeneration.

Until 2013/14, councils merely collected business rates for redistribution by central government. All the business rates collected nationally were passed back to councils as part of their overall funding allocation from central government. As this funding allocation was determined by a funding formula, some individual councils received back less in funding than they had collected in business rates. In an important change, from 2013/14 councils in England, other than PCCs, are able to keep a portion of the business rates raised in their areas. The system remains unchanged in Wales.

Business rate 50% retention – England only

Since April 2013, councils have been allowed to keep a proportion of the business rates they collect from businesses in their area. The proportion a council is allowed to keep depends upon the type of local authority. In all areas not currently piloting 100% retention, half of business rates have to be paid over to central government. Billing authorities continue to collect all of the business rates in their area on behalf of central government and the major precepting authorities, which, with the exception of PCCs, are the same as for council tax.

The shares of total business rates each type of local authority is allowed to keep under the 50% retention scheme are set out in the following table.

Table 2.5: Shares of total business rates

District councils	40%
County councils (with responsibility for fire)	10%
County councils (where there is a separate combined fire authority)	9%
Unitary and metropolitan councils (with responsibility for fire)	50%
Unitary and metropolitan councils (where there is a separate combined fire authority)	49%
Combined fire authorities	1%

Source: Business rates retention (GOV.UK)

Because the amount of business rates an individual council is able to collect will vary enormously depending upon location and the characteristics of the council, the government introduced a system of top-ups and tariffs to redistribute business rates. Councils with a relatively high level of business rates pay a tariff into a national pot which is used to pay top-ups to those councils with relatively low levels of business rates. The level of these top-ups and tariffs was set originally by the 2013/14 local government finance settlement, and revised to ensure no authority was better or worse off as a result of the 1 April 2017 revaluation exercise. Top-ups and tariffs increase by inflation every year until they are reset.

In order to prevent councils having to drastically cut services as a result of a significant fall in business rate income and to provide some protection against major economic shocks, the government introduced a safety net mechanism to ensure that no council will experience a fall in business rate income of more than 7.5% in any one year (under the 50% retention scheme). This safety net is paid for by a levy on what the government deems to be ‘excessive growth’. Councils whose business rates increase by more than inflation have to pay over a greater proportion of business rates to government.

The levy rate for each council is set as part of the local government finance settlement. To ensure that an incentive for growth is retained, the levy rate is capped at 0.5, ie all councils are able to keep at least half of the growth in their local share of business rate income.

The amount of business rates a local council will take into account when setting its budget each year is set when the billing authority completes its estimate of business rate income for the following year in January and completes a return to government (called the NNDR1 form) setting out this amount. This also fixes the amount that the council will pay over to government.

Business rate income collectable is paid into the collection fund, administered by the billing authority. The collection fund then makes payments out to the billing authority general fund, the major preceptors and government, based on the NNDR1 estimate. If more income is received than estimated, this creates a surplus on the collection fund, or if less is collected, a deficit, and this is paid over to the individual councils and government over the following two years.

Where a council’s NNDR 1 estimate is so low that the safety net becomes payable, payments are made on account by government during the year. Any levy payments and the difference between estimated and actual safety net payments become payable at the end of the financial year, although the actual cash is paid over in the following financial year.

Business rate 100% retention

Prior to the 2017 election, the government was committed to allow local authorities to retain 100% of business rate income from 2019/20. Following the election, development of the details of the scheme paused until the future of the policy became clearer. There is now an expectation that 75% retention will be allowed from 2020/21. Although a number of authorities have piloted 100% retention schemes in 2017/18 and 2018/19, 75% retention is being piloted in 2019/20.

Revenue Support Grant

Revenue Support Grant is a grant paid by government to support councils’ general expenditure. There are no restrictions on how it is to be used (within a council’s legal powers) and the amount each council will receive is set out in the local government finance settlement. While 100% business rate retention remained government policy, the intention had been to phase out Revenue Support Grant by 2019/20 by replacing it with the retained rates. The current Fair Funding Review will set new funding baselines for every authority alongside the introduction of business rate retention in 2019/20, but the overall quantum of funding available for local government remains a matter for central government’s spending review process.

Chapter 3

Capital budgets and resources

Capital Budgets

A council’s capital budget covers the money it spends on investing in buildings, infrastructure and expensive pieces of equipment. Capital spending by councils is mainly for buying, constructing or improving physical assets such as:

■buildings – schools, houses, libraries, museums, police and fire stations, etc
■land – for development, roads, playing fields, etc
■vehicles, plant and machinery – refuse collection vehicles, fire engines, police cars, etc.

It also includes grants and advances made to the private sector or the rest of the public sector for capital purposes, such as advances to housing associations. In order to count as capital expenditure, new assets or additions to assets must have a life of more than one year.

At the discretion of the secretary of state, certain revenue costs can be treated as if they are capital costs. This process, known as a capitalisation direction, is subject to an annual application process and is typically used for one-off items such as redundancy costs and meeting the costs of equal pay claims. The secretary of state can also extend the definition of capital expenditure using regulations.

Councils in England spent �23.3bn on new assets and additions to existing assets in 2016/17, an increase of 3% on the �22.6bn spent in 2015/16. In Wales, councils spent �1.1bn in 2015/16, an annual decrease of 45% mainly due to the housing revenue account subsidy buyout included within ‘other services’ in the previous year.

Capital receipts are received when a council sells capital assets. Capital receipts for councils in England have increased modestly in 2016/17 to �3.586bn from �3.580bn in 2015/16, increasing by 0.1%. In 2016/17 councils in Wales received capital receipts of �93.7m, an increase of 38.1% from the �67.9m in 2015/16.

The chart below shows capital expenditure and capital receipts for the period 2012/13 to 2016/17.

Figure 3.1: Capital expenditure and receipts – England and Wales 2012/13 to 2016/17

Source: National Statistics, Local Authority Capital Expenditure and Receipts: England 2016/17 Final Outturn, September 2017 and Welsh Government Statistical Release, Local Authority Revenue and Capital Outturn Expenditure: 2016/17, October 2017

The chart also shows the expenditure excluding the Greater London Authority (GLA), as the GLA tends to distort the total council capital spending figures as it includes expenditure on large infrastructure projects by Transport for London.

Financing of Capital Expenditure

Councils finance capital spending in a number of ways, including:

■the use of their own revenue funds – councils are free to spend money from their revenue budgets on capital schemes; this is known as direct revenue financing. This includes the major repairs reserve which is a special reserve that provides capital funding for housing
■capital receipts – this is the money received from the disposal of capital assets and generally can only be used for repayment of debt or to finance new capital expenditure
■borrowing – councils can borrow money to pay for capital assets
■grants and contributions – these can come from central government or other organisations.

The following graph shows the proportion of capital expenditure financed by borrowing and other sources of finance in England and Wales over the period 2012/13 to 2016/17.

Figure 3.2: Financing local authority capital expenditure – England and Wales 2012/13 to 2016/17

Sources: National Statistics, Local Authority Capital Expenditure and Receipts, England: 2016/17 Final Outturn, September 2017; Welsh Government Statistical Release, Local Authority Revenue and Capital Outturn Expenditure: 2016/17, October 2017

The graph shows that the proportions of capital expenditure financed by:

■grants and contributions have risen over the years, reflecting that all support from central government in England now comes through grants rather than the previous supported borrowing. In 2016/17, 44% of capital expenditure was financed from grants and contributions
■capital receipts have remained at a broadly stable proportion of capital financing over the period 2012/13 to 2016/17, with 10% capital expenditure being financed from capital receipts in that year
■revenue contributions fell to 17% in 2016/17 from 20% of the total capital expenditure financed in 2015/16
■borrowing increased and reverted to the 2011/12 levels to 29% of the total capital expenditure finances in 2016/17. Capital Expenditure and Receipts, 2016-17 Final Outturn Statistical Release issued by the then DCLG in September 2017 indicates that a significant part of this increase in borrowing is due to local authorities making commercial acquisitions.

The Prudential Code

Before 2004, there was a very complicated framework of rules and regulations that controlled how councils were allowed to invest in assets and the amount that they could spend. April 2004 saw the introduction of CIPFA’s Prudential Code for Capital Finance in Local Authorities., which provides a framework within which councils can judge for themselves whether capital investment is affordable, prudent and sustainable in the year in question and in future years. The Prudential Code is given statutory backing, which means that councils are required to ‘have regard’ to it by the Local Government Act 2003 (in England and Wales) and the Local Government in Scotland Act 2003.

The current Prudential Code requires a council to think about six things when it agrees its capital programme:

1. The council’s service objectives – are the capital spending plans consistent with the council’s strategic plan and its future plans for its services?

2. The stewardship of the council’s assets – is the capital expenditure being spent on new assets at the cost of maintaining existing assets?

3. The value for money offered by the plans – have all the options for investment been considered and do the benefits outweigh the cost?

4. The prudence and sustainability of its plans – can the council afford the borrowing now and in the future?

5. The affordability of its plans – what are the implications for the council tax?

6. The practicality of the capital expenditure plan – does the council have the resources to manage the project and does the total capital programme look sensible?

The update to the Prudential Code in 2017 introduced the requirement to produce a capital strategy. The capital strategy should demonstrate that the authority takes capital expenditure and investment decisions in line with service objectives and properly takes account of stewardship, value for money, prudence, sustainability and affordability.

Councils need to prove that they are complying with the Prudential Code. This is done through a series of prudential indicators that are set locally and approved at the same time as the council sets its budget for the following year. The table below sets out the current key prudential indicators.

Table 3.1: Key prudential indicators

Indicator	Description
Estimate of the capital financing costs to the authority’s net revenue stream over the next three years	This indicator helps a council identify if borrowing costs become too high as a proportion of its budget. This is important as borrowing costs always have to be paid and are very hard to cut if resources fall.
Actual capital financing costs to the authority’s net revenue stream	The current value of the indicator above. This gives a baseline against which a council can see if borrowing is forecast to become a greater or a lesser part of the budget in the future. It also allows the accuracy of past estimates to be measured.
Authorised limit	The maximum amount of money a council can borrow. This amount can be changed at any point during the year by a meeting of the full council.
Operational limit	The maximum amount of money a council expects to borrow during the year. This is lower than the authorised limit and acts as a useful warning sign if it is breached during the year, which could mean that underlying spending may be higher or income lower than budgeted.
Debt compared to the capital financing requirement	Councils are only allowed to borrow money in the medium term to finance capital expenditure. Short-term borrowing can fund cash flows but borrowing cannot be used to fund the revenue budget. This indicator compares debt to the council’s underlying need to borrow (its capital financing requirement) in order to show that borrowing is only being used to finance capital expenditure over the medium term.

Source: CIPFA, The Prudential Code for Capital Finance in Local Authorities (2017 Edition)

In addition to setting limits for borrowing and the capital programme, the council is required to set detailed ratios and limits for how it manages its borrowings and investments under CIPFA’s Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes (2017) (‘Treasury Management Code’). CIPFA also publishes Treasury Management in the Public Services: Guidance Notes for Local Authorities incl Police and Fire Authorities (2018).

Treasury Management

Treasury management is the term used to describe the way a council manages the cash it needs to meet both its day-to-day running costs and borrowing for capital expenditure. The following table highlights some of the main cash inflows and outflows of a council.

Table 3.2: Key cash flows for a council

Day to day

Longer term

Cash in

Cash out

Cash in

Cash out

Council tax and business rate income (or precept for upper-tier authorities)

Revenue Support Grant

Other grants and income from charging for services

Precepts (from billing authorities to precepting authorities)

Wages and salaries

Payments to suppliers

Grants to other bodies

Cash-backed reserves and provisions

Capital receipts

Grants and contributions

Borrowing

Capital expenditure

Repayment of borrowing

Source: CIPFA

The treasury management function for a council will make the arrangements to borrow and invest money over either the short term or the longer term in order to ensure that it has money available when it needs it. Councils may borrow money from banks and building societies, other councils, the financial markets or the Public Works Loan Board (PWLB), which is part of the government’s Debt Management Office and allows councils to borrow at interest rates closer to those paid by central government for its borrowing. Councils invest money mainly with banks and building societies but may also invest in other places such as money market funds and the government’s Debt Management Office. The government intends to simplify the institutional arrangements by abolishing the PWLB and transferring its powers to the Treasury, which in turn will delegate operational responsibility to the Debt Management Office. These changes will have no practical implications for local authorities.

In making arrangements for treasury management, a council is required to follow CIPFA’s Treasury Management Code, which aims to help ensure that councils manage the significant risks associated with the function while also ensuring the council receives value for money. It defines treasury management as:

The management of the organisation’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.

It is very important that councils understand the risks that are associated with treasury management, as highlighted by the collapse of the Icelandic banks a number of years ago, which put at risk substantial funds that had been invested by councils. The key treasury management risks are:

■credit risk – the risk that a bank or other institution will not be able to pay back the money invested in it
■interest rate risk – the risk that a council’s budget will be adversely affected by unforeseen changes in interest rates
■liquidity risk – the risk that a council will have funds tied up in long-term investments when it needs to use that money
■refinancing risk – the risk that when loans and investments reach the end of their term, the council will not be able to re-borrow or reinvest the money on acceptable terms or interest rates
■legal and regulatory risk – the risk that unforeseen legal and regulatory changes have an adverse impact on a council.

A council is required to approve a treasury management strategy, which sets out how it will borrow and invest money and manage those risks. The strategy is likely to include the following items:

■details of its appetite for risk and how it proposes to manage its risks, ensuring the key principles of security (getting your money back) and liquidity (having money available when you need it); and only when these two principles are ensured, considering yield (how much return it gets for its investment)
■details of how it assesses the credit worthiness of institutions it is planning on investing money with
■details of its training plans for both officers and members
■details of its use of third parties such as treasury management advisors.

It should also include the following treasury management indicators:

■An upper limit on the level of investments for periods longer than a year, which limits the amount of money that a council can invest for a fixed term of a year or more to ensure that the liquidity risk is managed. Longer-term investments also increase credit risk as councils may not be able to get their money back, or may face heavy penalties if they can do so, if an institution’s credit worthiness changes. When the Icelandic banks’ credit ratings were downgraded, many councils were unable to take existing investments out of these banks.
■Upper and lower limits for the maturity structure of borrowings. The maturity structure of borrowings is a term used to describe the profile of the dates that loans need to be repaid. A council will want to arrange its portfolio of loans so that they do not all come to an end at the same time and so that at any time it is borrowing only the amount of money it needs. This indicator helps a council manage its refinancing risk and avoid unnecessary credit risk by having to invest money as a result of over-borrowing.

As a result of increasing investments in other financial assets and property primarily for financial return, rather than as part of treasury management activity, the CIPFA Treasury Management Code includes specific requirements concerning these forms of investment. These forms of investment should follow the underlying principles that are prescribed for treasury management investment. For some investments, such as property, this can require specialist skills and expertise which councils will need to ensure that they have in place.

The way the treasury management risks interact is very complicated and councils will rely heavily on professional advice from specialist officers and external advisors. It is important, however, that senior officers and councillors understand the treasury management risks the council is taking and they should remember that the responsibility for treasury management must always remain within the council.

Chapter 4

Local authority accounting and reporting

Local authority accounting, while based on the same accounting standards as the private sector, does in some cases need to adapt and reinterpret those standards for use in councils. In addition, the government makes specific rules known as statutory requirements that local authorities must follow when they prepare their financial statements, limiting the amount that can be charged to council tax payers and avoiding significant changes in expenditure from one year to the next. As a result, local authority accounting is a combination of the accounting standards that dictate how all organisations should account, and legislation.

Accounting standards known as International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board (IASB). These set out how accountants should recognise (record) and present items in the annual statement of accounts. Legislation is set out through a mixture of regulations and accounting directions that are issued by the MHCLG and the Welsh Government, requiring councils to treat certain items in the accounts differently from the accounting standards.

All the accounting requirements for councils are brought together in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the ‘CIPFA/LASAAC Code’). This chapter of the guide outlines some of the key accounting principles and looks at the annual statement of accounts that all councils are required to produce. This is a simplified overview that is aimed at giving the reader a general understanding when reading the accounts of councils.

Annual Statement of Accounts

Each local council in England is required to produce an annual statement of accounts in practical terms by 31 May, immediately following the end of the financial year. This date currently differs for Welsh authorities, although there is a timetable which will align authorities in Wales with those of England by 2020/21. The accounts contain detailed information on the financial performance, financial position and cash flows of the council. They show not just the income and expenditure of the council, but also the assets and liabilities it holds. The statement of accounts is a key way that councils are able to demonstrate that they are using public money properly, known as financial stewardship. The format of the statement of accounts is set out in the CIPFA/LASAAC Code and contains the following key statements.

Comprehensive income and expenditure statement	This is where all the income and expenditure of the council is recorded in line with accounting rules. This statement is similar to the one you would find in a private company.
Movement in reserves statement	This statement shows the impact of the financial year on the council’s reserves. This statement also includes all of the income and expenditure that is recognised under accounting rules but which is then adjusted by legislation to give the amount of expenditure that has been funded by the local tax payer.
Balance sheet	This statement summarises a council’s financial position at each year end and reports the assets, liabilities and reserves of the council. Some of the reserves are specific to councils, such as the pensions reserve and the capital adjustment account, and exist to allow accounting entries required by legislation.
Cash flow statement	This summarises the cash flows that have been made into and out of the council’s bank account during the financial year.

Accruals

The principle of accruals is a key one for accounting and it describes when income and expenditure is recognised (included) in the accounts. This contrasts with the simplest form of accounting, the cash basis, when transactions are recognised in the accounts when the actual cash is received or paid out. This cash basis would not, however, accurately reflect the true position of the council as it would not show how much the council owes or is owed.

Under the accruals basis of accounting, income and expenses are recorded when earned and incurred, regardless of when cash is exchanged (ie received or paid). Income is recognised when it is earned (ie services are provided) and expenses are recognised when costs have been incurred (ie goods or services are provided).

Take for example a council purchasing home care services from a supplier in order to meet the needs of an elderly resident who pays for the service received. The council would include the cost of the home care service in its accounts when it is provided even if it had not yet been invoiced or paid for. It would then also include the income due from the resident as soon as the service was provided. Income and expenses included in a council’s accounts that have not yet been settled (ie cash has not been received or paid) will normally give rise to debtor (receivables) and creditor (payables) balances in the council’s balance sheet.

In summary:

■Debtors/receivables come into existence where income has been recognised but payment has not yet been received by the council. Put simply, debtors are individuals or organisations that owe the council money.
■Creditors/payables come into existence where expenditure has been recognised but payment has yet to be made by the authority. Put simply, creditors are individuals or organisations to whom the council owes money.

Taking the home care example, a debtor would be created and income recognised even where the income is payable in the future following the eventual sale of the client’s home.

Capital Accounting

Capital accounting is the term used to describe the entries in a council’s accounts that are made in relation to its non-current assets, otherwise known as property, plant and equipment – mainly buildings, infrastructure and pieces of equipment. They are called ‘non-current’ as they are expected to provide services or economic benefit to the council for more than one year. There are two key elements to capital accounting:

1. to ensure that the value of the council’s assets are correctly reflected in its balance sheet so that the balance sheet gives an accurate view of the council’s overall financial position

2. to reflect the cost of using assets as an expense of the council so that the cost of service provision shows the total cost.

Asset Valuation

When the council invests in new assets it includes these in the balance sheet at the cost of the investment made plus any expenses. In order to ensure that the balance sheet is kept up to date, assets need to be regularly revalued, at least every five years or more frequently for the assets whose values may be volatile. If council assets are not regularly updated, then the balance sheet will very soon become out of date. To take an extreme example, if a Victorian school building were left on the balance sheet at the amount it cost to build, it may be undervalued by several tens of millions of pounds. The following table sets out the main categories of assets and how they are valued.

The table below reflects the CIPFA/LASAAC Code’s adoption of IFRS 13 Fair Value Measurement, which applied from 1 April 2015. However, the CIPFA/LASAAC Code adapts the measurement requirements for property, plant and equipment and has introduced the concept of current value. This definition of current value means that the measurement requirements for property, plant and equipment providing service potential for an authority have not changed from previously, ie they are measured for their service potential either at existing use value, existing use value – social housing (for council dwellings) or depreciated replacement cost (for specialised assets), and not at fair value.

Since 2015/16, the CIPFA/LASAAC Code has, however, changed the measurement requirements for assets classified as surplus assets. These assets are now measured at fair value in accordance with the definition in IFRS 13 and without any adaptations to that definition. Where applicable, all other assets are measured at fair value.

Table 4.1: Asset valuations

Category of asset	Description	Valuation	Description
Land and buildings	Land and buildings used to provide services	Current value based on existing use or depreciated replacement cost	A valuation based on how much the assets could be sold for if they were sold for the same purpose they are currently used for, eg a school is valued if sold for use as a school rather than for housing. Revalued at least every five years and more frequently if necessary.
Vehicles, plant and equipment	Vehicles, plant and equipment used to provide services
Infrastructure	For example roads, footpaths, bridges and tunnels	Depreciated historical cost Cost	The cost of acquiring the asset or work carried out to date.
Assets under construction	New buildings that are in the process of being built	Depreciated historical cost Cost
Housing – dwellings	Houses used to provide social housing	Existing use value – social housing	The current value of the houses if they were to be sold to be used for letting for social rents.
Heritage assets	An asset with special qualities that is held and maintained principally for its contribution to knowledge and culture	Valuation, or cost where a value is not available	Value does not have to be professional valuation but could be an insurance valuation (for museum or art gallery exhibits, for example). For some assets, a value may not be available (for example an archaeological site) and cost can be used where this is available.
Community assets	Assets that the council intends to hold in perpetuity, for example a park	Cost or as per heritage assets	Councils can choose to use cost or the same basis as heritage assets.
Investment assets	Assets held for income generation purposes rather than service provision	Fair value as at balance sheet date	These are valued at fair value (ie highest and best use).

Source: CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom

Where a council is in the process of selling an asset or has made the decision to sell an asset, it is classified as an asset held for sale and is included in current assets on the council’s balance sheet. This reflects the fact that the council does not intend to hold the asset for the long term.

When an asset is revalued, this creates a difference between its previous value and its current value. A change in valuation is generally reflected in the revaluation reserve. When an asset’s value falls, ie a revaluation loss (or it is impaired, eg becomes obsolete or physically damaged), the revaluation reserve can be reduced by this fall in value provided that the value of the asset in question has previously increased by at least as much (accumulated revaluation). If the accumulated revaluation figure for an asset is not enough, any balance between the fall in value and the accumulated depreciation has to be charged to the comprehensive income and expenditure statement (CIES).

Depreciation

Depreciation is the term used to describe the charge that is made to the CIES to reflect the council’s use of its assets. The argument is that, in using an asset to provide services, its value is diminished. This is most simply illustrated by taking a vehicle as an example. Suppose a council buys a new minibus for �20,000 which it intends to use for ten years, at which point it expects to sell it for �10,000. If it included just the cash values in its accounts, it would have expenditure of �20,000 in the first year and income of �10,000 in year 11. In years two to ten it would still be using the minibus but would show no cost in its accounts of doing so. If, instead, it spread the �10,000 cost of owning the asset (the purchase cost of �20,000 less its final value of �10,000) over the ten years of expected use, it would charge �1,000 per year to its CIES.

The actual calculation of depreciation is slightly more complicated in practice but the principle remains the same, with an asset’s value, less any final value on disposal, being spread over the expected life of the asset. As the value of land, provided it is not being used for landfill or mineral extraction, does not change as a result of using it, land is not depreciated – only the buildings upon it.

Capital accounting in the movement in reserves statement

The CIES for a council will include the costs of depreciation, charges for impairment and gains and losses on the disposal of non-current assets. Depreciation and impairment have been described above while gains and losses on the disposal of non-current assets reflect the difference between the balance sheet value of an asset and the amount for which it is sold. Due to the way councils are financed and the fact that money received for the sale of non-current assets is tied up in capital receipts, the government does not want these to impact councils’ revenue reserves. So regulations have been made to take these items out in the movement in reserves statement (MiRS). Depreciation is replaced with a minimum revenue provision, which makes a charge to the accounts for the repayment of borrowing associated with capital expenditure. These adjustments are made against the capital adjustment account, which is an unusable reserve and is one of the reserves specific to councils’ accounts.

reserves and Provisions

Reserves

Reserves are split into usable reserves and unusable reserves in the balance sheet. Usable reserves include general and earmarked reserves, ie those reserves that can be spent on future services. Unusable reserves include all those accounting reserves that cannot be used for expenditure on services (these are explained further below).

General and earmarked reserves

When reviewing their medium-term financial plans and preparing their annual budgets, councils should consider the establishment and maintenance of reserves. These can be held for three main purposes:

1. a working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing – this forms part of general reserves

2. a contingency to cushion the impact of unexpected events or emergencies – this also forms part of general reserves

3. a means of building up funds, often referred to as earmarked reserves, to meet known or predicted requirements, but where the requirements or amounts are not certain enough to create a provision.

Earmarked reserves formally remain part of the general fund of the council. The general fund of a council represents the money available to local tax payers that can be used for expenditure on services. Key categories of earmarked reserves are as follows.

Table 4.2: Key categories of earmarked reserves

Category of earmarked reserve	Rationale
Sums set aside for major schemes, or to fund major reorganisations	Where major expenditure is planned in future years, it is prudent to set aside resources in advance.
Insurance reserves	Reserves held to fund repairs or replacement of assets where the council chooses not to buy insurance against these costs with external insurance companies.
Reserves of trading and business units	Surpluses arising from trading or business units may be held back to cover potential losses in future years, or to finance capital expenditure.
Reserves retained for service departmental use	Councils may let departments keep all or some of any underspends to use for future projects.
Reserves for unspent revenue grants	Where revenue grants are received by the council with no conditions or where the conditions are met and expenditure has yet to take place, it is recommended that these sums are held in earmarked reserves. (For further information on grant conditions please refer to Module 2, section C of the 2018/19 Code Guidance Notes.)
Schools balances	These are the unspent balances of individual schools’ budgets that can only be used by those schools.

Source: CIPFA

Unusable reserves

Councils also show a number of accounting reserves on their balance sheets. These are not backed by cash so cannot be spent on council services but arise because of entries in the accounts. These reserves are as follows.

Table 4.3: Unusable reserves

Category of unusable reserve	Rationale
Pensions reserve	This reflects the difference between the amount charged for pensions in the accounts under accounting rules and the actual payments made to various statutory pension schemes for the year.
Revaluation reserve	The accumulated balance of changes in the value of non-current assets.
Capital adjustment account	The difference between depreciation and the charges made to the accounts under capital accounting rules and the amounts charged under legislation.
Financial instruments revaluation reserve and financial instruments adjustment account	This reserve recognises (records) the fair value gains and losses for financial assets classified as fair value through other comprehensive income until derecognition.
Unequal pay back pay account	The difference between the amounts charged to the accounts for compensation for unequal pay under accounting rules and the amounts charged under legislation.
Collection fund adjustment account	The difference between the amounts recognised in the accounts for council tax and non-domestic rates income (England) and the amounts charged under legislation.

Source: CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom

Other reserves

Councils will hold the following two usable reserves:

1. capital receipts reserve – this reserve holds the proceeds from the sale of assets, and can only be used to fund capital expenditure or repay debt

2. major repairs reserve, where relevant (this applies only to housing authorities in England and Wales) – in England this reserve records the unspent amount of housing revenue account (HRA) balances for capital financing purposes in accordance with statutory requirements. In Wales this represents the amounts unspent from the major repairs allowance capital grant.

Provisions

A council may set up a provision when it knows that it is probable that it will have to pay out money or transfer assets in the future; for example, the council may be involved in a court case that could eventually result in the payment of compensation. Provisions are charged to the appropriate service line in the CIES when the council becomes aware of the need for them. When payments are eventually made, they are charged to the provision carried in the balance sheet. The level of provisions should be regularly reviewed to ensure they reflect the most accurate estimate of future cost.

Pensions

IAS 19 Employee Benefits is probably one of the best known financial reporting standards as it has been frequently mentioned in news items about final salary or career average earnings pension schemes. The accounting standard requires the balance sheet to reflect a snapshot of a pension fund’s assets and liabilities at the end of the financial year and the associated costs to be reflected in the CIES.

IAS 19 applies to all employee benefits but has a particular impact on defined benefit schemes where the pension paid is based upon the salary of the recipient, not the amount they have paid into their pension pot. Police and fire schemes are excluded from the accounting standard as they are ‘unfunded’ schemes, where contributions are used to pay existing pensions with the difference underwritten by government.

The difference between the cost of pensions under accounting rules (IAS 19) and the actual payments made is reversed out of the accounts in the MiRS against the pensions reserve in accordance with the requirements of regulations.

Other Accounts

Councils may use other accounts to record income and expenditure relating to certain services they provide or functions they carry out. Key accounts include are outlined in the table below.

Table 4.4: Key accounts

Trading accounts	Used where a council has set up a trading arm to record income and expenditure to assess whether or not the trading arm is creating a surplus of income over expenditure. The word ‘surplus’ is used instead of ‘profit’ in not-for-profit organisations such as councils.
Housing revenue account	Used to record the income and expenditure related to a council’s housing function and required by legislation.
Collection fund	Used to record income and expenditure related to council tax and non-domestic rates collected by billing authorities.

Source: CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom

Local Authority Financial Reporting

The statement of accounts is a key way that councils are able to show they are using public money properly and forms the core of local authority reporting. In addition, councils have to comply with some other key aspects of financial reporting.

Narrative reporting

The financial statements on their own can be difficult for a lay person to understand and interpret, so explanations and commentary are needed to help the reader make sense of the financial statements and to help demonstrate the extent to which the objectives of the council have been achieved.

Remuneration of senior officials

Since 31 March 2010, councils have been required to include detailed remuneration information for their senior employees in their annual statement of accounts. Remuneration includes all monetary and non-monetary payments made to an employee as part of their employment. It does not include employer pension contributions. However, for the purposes of disclosing senior officer remuneration in England and Wales, employers’ pension contributions must be reported in addition to the remuneration.

The transparency agenda

Councils are required to publish details of all items of expenditure over �500 because the government wants to encourage ‘armchair auditors’ – members of the public with an interest in council finances who are prepared to question councils over what they spend. In February 2015, the then DCLG published its latest version of the Local Government Transparency Code, which councils are required to follow.

The code requires councils to publish the following data:

■expenditure over �500
■Government Procurement Card transactions
■procurement information about every invitation to tender for contracts that exceed �5,000 and details of any contracts, commissioned activity, purchase order, framework agreement and any other legally enforceable agreement in relation to the provision of goods and/or services with a value that exceeds �5,000
■information on public land and buildings
■information on social housing asset value (details on the value of social housing assets within local authorities’ housing revenue accounts)
■grants to voluntary, community and social enterprise organisations
■an organisational chart of the staff structure of the council including salary bands and details of currently vacant posts
■information on trade union facility time, including the number of staff who are union representatives, the number of staff who devote at least 50% of their time to union duties and the names of the trade unions represented
■income and expenditure on the authority’s parking account, including details of revenue collected from on-street parking, off-street parking and penalty charge notices and an analysis of how any surplus on the parking account has been spent
■information on parking spaces, including the number of marked out controlled on and off-street parking spaces within their area
■information on senior employee salaries
■information on the council’s constitution
■the ‘pay multiple’ – the ratio between the highest paid salary and the median average salary of the whole of the council’s workforce
■information about the council’s counter fraud work and the measures in place to combat fraud.

This data should be published on the council’s website and in a format that is as widely usable as possible.

Chapter 5

Governance and the role of the chief financial officer

Governance

Governance comprises the arrangements1. put in place to ensure that the intended outcomes for stakeholders are defined and achieved.

Source: International Framework: Good Governance
in the Public Sector (IFAC/CIPFA, 2014)

Key elements of the systems and processes that comprise a council’s governance include arrangements for:

■developing codes of conduct, which define standards of behaviour for members and staff
■ensuring compliance with relevant laws and regulations, and internal policies and procedures, and that expenditure is lawful
■documenting a commitment to openness and acting in the public interest
■establishing clear channels of communications with all stakeholders
■developing and communicating the authority’s objectives and intended outcomes
■reviewing the effectiveness of the authority’s decision-making framework, including delegation arrangements and decision making in partnerships
■measuring the performance of services for users, for ensuring they are delivered in accordance with the authority’s objectives and that they represent value for money
■defining the roles and responsibilities of the executive, non-executive, scrutiny and officer functions
■reviewing the effectiveness of the framework for identifying and managing risks and demonstrating clear accountability and for ensuring effective counter fraud and anti-corruption arrangements are developed and maintained.

Each council is required to include an annual governance statement (AGS) with its statement of accounts that sets out how the council has monitored its governance arrangements throughout the year and reviewed how effective they are in supporting planned outcomes.

CIPFA has worked with the Society of Local Authority Chief Executives and Senior Managers (Solace) to produce Delivering Good Governance in Local Government Framework (2016) and accompanying guidance notes, which helps councils ensure that their governance arrangements meet best practice. These form the basis for the AGSs published each year.

The Role of the Chief Financial Officer

The chief financial officer (CFO) is the person in the most senior finance role in a council. The CFO in a council has to be a member of a professional accountancy body such as CIPFA. This means that in carrying out their job they are bound by very rigorous professional rules and expectations. The CFO also has very specific legal responsibilities to the local tax payer.

The role and responsibilities of the ‘treasurer’ were developed by case law in England and Wales. In Attorney General v De Winton 1906, it was established that the treasurer is not merely a servant of the council, but holds a fiduciary responsibility to local tax payers. This means that when CFOs give advice and carry out their jobs they have to think about what is the best decision not only for the council, but also for local tax payers.

Section 151 of the Local Government Act 1972 requires councils to “make arrangements for the proper administration of their financial affairs” and appoint a CFO to have responsibility for those arrangements. This means that the CFO is legally responsible for ensuring that a council manages its finances properly.

To help CFOs to do their job and councils to understand how they can ensure their arrangements support CFOs in their legal responsibilities, CIPFA has published The Role of the Chief Financial Officer in Local Government (2016), plus separate reports for police and local enterprise partnerships in recognition of their different arrangements. The report goes into detail about the role, but it is based upon the five principles set out below.

The CFO in a local authority:

■is a key member of the leadership team, helping it to develop and implement strategy and to resource and deliver the authority’s strategic objectives sustainably and in the public interest
■must be actively involved in, and able to bring influence to bear on, all material business decisions to ensure immediate and longer-term implications, opportunities and risks are fully considered, and alignment with the authority’s financial strategy
■must lead the promotion and delivery by the whole authority of good financial management so that public money is safeguarded at all times and used appropriately, economically, efficiently and effectively.

To deliver these responsibilities, the CFO:

■must lead and direct a finance function that is resourced to be fit for purpose
■must be professionally qualified and suitably experienced.

Chapter 6

Audit and value for money

External Audit – Current arrangements

The external auditor of a private sector organisation is required to carry out an in-depth examination of the annual statement of accounts and certify that it represents a ‘true and fair’ view of the financial position of the organisation. If an auditor finds material errors in the accounts or views them as misleading, they can ‘qualify’ them, which means that they publicly report on why accounts do not give a true and fair view.

This is essentially the same process that is carried out by the external auditor of a council. However, external audit is also very important in ensuring proper stewardship of public money; therefore, in councils, external auditors look not only at the financial statements but also at the financial aspects of how a council is managed. The external auditor must satisfy themselves that the accounts are prepared in accordance with regulations and accounting rules and that the council made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. Auditors may report on their work to the general public and other key stakeholders.

In England, until 31 March 2015, the Audit Commission was responsible for appointing local authority auditors from private firms of accountants. However, the Local Audit and Accountability Act 2014 formally abolished the Audit Commission and established new arrangements for the audit and accountability of certain public bodies including local authorities. Importantly, it requires these public bodies to appoint their own external auditors, replacing the previous process of commissioning of external auditors that had been carried out by the Audit Commission.

Public Sector Audit Appointments Ltd (PSAA) was appointed by the government to offer an auditor procurement and appointment service for auditors for financial years from April 2018. The majority of principal bodies have opted into this arrangement but a small number chose to make their own appointments.

Smaller councils, such as parish or town councils, were able to appoint their own auditors for the financial year beginning 1 April 2017 and larger authorities, such as London boroughs, county councils or unitary authorities, were required to appoint their own auditors to start from the financial year beginning 1 April 2018. Many have done this by employing the services of PSAA.

In Wales, audit is the responsibility of the Wales Audit Office, which carries out audits using its own staff.

The Code of Audit Practice, published and maintained by the National Audit Office (NAO), sets out in detail how the auditor should fulfil this role and gives further details of the external auditor’s objectives when conducting an independent assessment of a council. The Code has to be approved by both Houses of Parliament at five-yearly intervals and auditors must comply with it. The most recent version applies from 1 April 2015. In Wales, the Code is the responsibility of the Wales Audit Office and is approved by the Welsh Assembly. The current Code was approved in 2018.

The English Code also outlines how auditors should fulfil other statutory functions outlined in the Local Audit and Accountability Act 2014. These functions are:

■to give electors the opportunity to raise questions about the accounts and then to consider and decide upon any objections received from electors in relation to the accounts
■to apply to the court for a declaration that an item of account is contrary to law
■to consider whether to issue an advisory notice or to make an application for judicial review.

The results of audit work are communicated in the following reports:

■the audit planning document – this sets out how auditors intend to carry out their responsibilities in the light of their assessment of risks. It also includes the auditor’s assessment of threats to ethics and independence and how they have safeguarded these
■reports to councillors or officers on specific areas of their audit work where they have concerns; these can be in writing or verbal
■an audit report, including the auditor’s opinion on the financial statements; a conclusion about whether the audited body has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources; and a statement on the consistency of consolidation schedules prepared by the authority with the financial statements
■a certificate that the audit of the accounts has been completed in accordance with statutory requirements
■an annual audit letter about the key issues that the auditor considers should be brought to the attention of the audited body.

Other specific reports may be issued at any point during the audit process, if required:

■to consider whether, in the public interest, an issue should be considered by the body concerned or brought to the attention of the public
■to make written recommendations that need to be considered and responded to publicly.

The external auditor has particular duties in relation to questions of:

■legality – whether the council has incurred expenditure that it had no legal power to do
■rights of challenge to the accounts – where an elector has formally raised an issue with the auditor about an item in the accounts.

To fulfil these duties, the auditor has access to all documents as appear necessary for the purposes of the audit. Auditors may decide:

■to refer any issues to the council, so that the council can formally and publicly consider their recommendations, or
■to take the matter through the courts, so that expenditure can be stopped, or
■to ask the courts to review a decision the council has made. This is known as judicial review.

Before each audit of the financial statements, the current requirement is that accounts and documents must be available for public inspection for 30 working days. Any person interested may come into the council to view those accounts and supporting documents. They are allowed to make copies. In addition, those entitled to vote in an area may meet the external auditor and question them about the accounts.

Internal Audit

The internal audit team may be employed directly by a council or by an external service provider. All councils are required by legislation to have internal audit to evaluate the effectiveness of their risk management control and governance processes. This function must be performed to professional internal audit standards.

The Public Sector Internal Audit Standards (PSIAS) define internal auditing as follows:

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

In order to carry out their work, internal auditors will focus their efforts on major areas of risk, including strategic and service risks as well as financial risks. The audit could include a range of activities such as:

■reviewing the procedures for spending money and collecting income within the council and testing transactions
■reviewing the quality and accuracy of performance data and management reports
■reviewing compliance with council policies and legislation
■providing assurance on the effectiveness of arrangements put in place to achieve the council’s goals.

The head of internal audit is required to give an annual opinion on the governance, risk management and the internal controls within the council. They may also provide support for other functions such as counter fraud and corruption, helping to share anti-fraud and anti-corruption messages with the employees of the council.

The role of internal audit is set out in a written document, known as the charter, which also ensures it has access to all the council’s systems, records and personnel that it needs to do its job properly. This charter also sets out internal audit’s power to report its findings to ensure that it has appropriate access to decision-making bodies.

Audit Committees

Audit committees are special committees of the council that are set up to provide an independent and high-level resource to support good governance and strong public financial management. They play an important role in the oversight of both internal and external audit. Audit committees often include independent members who are not councillors but sit on the committee for their financial knowledge. The head of internal audit and the external auditor should have a right of direct access to the audit committee.

CIPFA has published a Position Statement setting out principles for an effective structure, membership and functions of the committee. This is supported by detailed guidance.

Chapter 7

Education

Introduction

The local authority role in education is carried out by county, metropolitan and unitary councils. In London, the London boroughs have responsibility for education, while the mayor has a role in promoting educational standards across London.

Education is provided in England by the main types of school described below:

■Schools which are maintained by and funded through local councils. This includes community schools, voluntary controlled schools, voluntary aided schools and foundation schools.
■Academies which are publicly funded independent schools. They are funded directly by the government through the Education and Skills Funding Agency (ESFA), although their funding is calculated on a comparable basis to that received by local authority maintained schools in the area in which the academy is situated. Academies have more freedom to decide how they operate and can also have involvement from private sector companies and sponsors.
■Free schools, which are very similar to academies in the way they are funded and in their freedom to decide how they will operate. They are often established in response to groups of local parents, teachers or faith groups getting together to decide that there is a need for a new school in their area. They do not have to follow the national curriculum. Free schools include:
– University technical colleges (UTCs), a type of secondary school for those aged 14 to 18, in England, led by a sponsor university. In January 2018, there were 49 UTCs.
– Studio schools, which are designed for those aged 14 to 19 and of all abilities. They are small schools for 300 students, with year-round opening and a 9 to 5 working day. They are said to feel more like a workplace than a school. In January 2018, there were 33 studio schools.

Local authorities must ensure that there are sufficient good quality school places in their locality. They have a key role in ensuring that the school admission process is fair and at present still have an important role in the provision of school places. In January 2018, according to Department for Education (DfE) statistics, there were:

■16,766 state funded primary schools (excluding special academies and alternative provision) of which 12,174 were funded by local authorities
■3,436 state funded secondary schools including 963 funded by local authorities.

In January 2018, approximately 3.3 million (70%) primary school pupils and 0.9 million (28%) secondary school pupils were educated in local authority funded schools.

For councils, the main issue raised by schools converting to academy status is typically managing the change and minimising the impact on their finances, particularly where the level of services sold to schools changes if the new academies then choose to buy those services from elsewhere.

Education remains a key priority for the government and the spending review and Autumn Statement 2015 included a commitment to protect schools’ funding in line with inflation.

Education remains the biggest local government service, with budgeted revenue expenditure of �34bn in England in 2018/19. This figure excludes expenditure on academies, which are funded directly by the DfE via the ESFA. Education accounted for around 37% of total spending on all local government services.

Schools Funding Formula

At present the funding of each school is determined by a national formula allocating grant to each local education authority and then a formula set by each local authority to allocate funds to each of its schools. The government started a process in 2012 to reform the school funding system to make it fairer, more consistent and more transparent. The government set out how the system would start to change ahead of the then anticipated introduction of a national funding formula by which the core funding of each school would be determined.

Currently, revenue funding is distributed to local authorities by the DfE through the Dedicated Schools Grant (DSG) which is a ringfenced grant to be used for pupil provision. Historically the DSG baselines for each local authority were pegged at local authority spend levels from 2005/06, however, these were revised recently to move to the expenditure levels that were planned for 2017/18.

From 2013/14 the government’s funding formula reform split the DSG into three blocks:

1. the schools block

2. the early years block and

3. the high needs block.

From 2018/19 they established an additional ‘central school services block’. This covers funding allocated to local authorities to carry out central functions on behalf of pupils in both maintained schools and academies in England

The schools block is the largest block and is intended to cover core provision for pupils in primary and secondary education to the age of 16.

From 2018/19 the schools block is ‘ringfenced’, but to give local authorities some flexibility in meeting local need (ie high needs pressures) it was agreed that transfers could occur between the blocks but these are limited to 0.5% of authorities’ total schools block, and can only be made with the agreement of the schools forum

Most of the DSG is distributed to maintained schools using locally determined formulae. However, there has been significant variation in how local authorities allocate funding to schools. In order to move to a more consistent, comparable and transparent system, from April 2013 local authorities were required to use much simpler formulae specified by the ESFA

Local authorities are now limited to a maximum number of factors (ie cost drivers) in their formulae, which relate largely to pupil characteristics and pupil numbers (taken from the Annual School Census data), and less so to the circumstances of the school. Local authorities must also use national data sets prescribed by the ESFA in their funding formulas.

Funding is available for pupils with high needs in special schools or mainstream schools, based on the needs of the pupil. This will come from the schools block or the high-needs block, depending on the special educational needs (SEN) provision required.

From 2014/15, the government required that a minimum of 80% of delegated schools block funding is allocated through an appropriate and locally determined combination of the pupil-led factors.

In March 2014 the government announced that it had decided not to set out a multi-year process of converging all local authorities towards a single funding formula at that time. Instead, the government published a consultation on fairer school funding from 2015. This proposed allocating additional funding of �350m for 2015/16 – every local authority would attract a minimum funding level for every pupil and school.

Approach for 2015/16 and 2016/17

Following the above consultation and the government’s response, the DfE published Fairer Schools Funding: Arrangements for 2015 to 2016 in July 2014. This set out a number of reforms that the government was making to the schools funding system for 2015/16. The main proposals included:

■funding all local authorities to at least the same cash level as in 2014/15
■allocating an additional �390m (rather than �350m announced earlier) to fund schools in the least fairly funded authorities.

To protect schools from significant budget reductions, the government ensured that no school saw a reduction larger than 1.5% per pupil in its 2014/15 budget compared to 2013/14 (excluding sixth form funding). This commitment was reiterated for 2015/16. In addition, local authorities with falling school numbers continued to be protected by arrangements that ensure that no authority lost more than 2% of its budget in cash terms.

For 2016/17, allocations for the schools block were calculated largely on the basis of how much an area received per pupil in 2015/16 with some adjustments. The �390m fairer schools funding was continued. The core schools’ budget continued to be protected and per pupil funding together with the pupil premium was maintained in cash terms. However, the government made savings from the Education Services Grant (ESG) which funds local authorities and academies for services such as school improvement and education welfare services.

Once a school has converted to academy status, it ceases to be funded through the council. Instead, its funding comes in the form of a grant, known as the General Annual Grant, paid by the ESFA.

Schools national funding formula

A key determinant of how much a local authority received per pupil in its DSG was how much it had received in previous years. This was known as the ‘spend plus’ methodology. Owing to historical differences in funding, the average amount per pupil funding varied considerably between authorities.

In September 2017, the government went on to announce further changes including a ‘national funding formula’, effective from April 2018. This commenced with a ‘soft’ funding formula in 2018/19 with plans to eventually move to a ‘hard’ funding formula.

As part of the move to the national funding formula DfE looked at DSG baselines and amended them. The ‘spend plus’ methodology which pegged allocations at 2005/06 levels was deemed out of date and a new starting point based on planned expenditure from 2017/18 was introduced.

See GOV.UK for further detail.

The move to a national funding formula has also meant that funding ‘floors’ and ‘gains gaps’ have been introduced. For 2019/20 the funding floor is a 1% gain per pupil against 2017/18 baselines and the gains gap is 6.09% per pupil against 2017/18 baselines.

Pupil Premium

The pupil premium aims to provide significant funding for disadvantaged children to help close the attainment gap. The pupil premium is allocated to schools for most pupils and can be seen separately in their funding. Schools can decide how the pupil premium is spent but they have to say how they have used the extra money to support deprived pupils.

For 2018/19, schools attract �1,320 for primary school pupils, �935 for secondary school pupils, �2,300 per looked after child and �300 for service children. The pupil premium for primary and secondary is allocated based on ‘Ever 6’, which is the number of children who are known to be eligible for free school meals in any of the previous six years. For looked after children it is allocated based on children who have been looked after (by the council) for at least one day.

Sixth Form and Further Education

The government is committed to helping all 16 and 17-year-olds to take part in education or training and raised the participation age to 18 in 2015.

Raising the participation age does not mean young people must stay in school; they will be able to choose one of the following options:

■full-time education, such as school, college or home education
■work-based learning, such as an apprenticeship
■part-time education or training if they are employed, self-employed or volunteering for more than 20 hours a week.

For this to be successful, all sections of the education system will need to play their part. Councils are expected to play a key role in championing the needs of young people in their areas and in working with partners to achieve full participation.

Education in Wales

In Wales there are some 1,521 state schools, with around 467,112 pupils. In January 2018 there were 11 nursery, 1,261 primary, 195 secondary, 13 middle and 41 special schools. Secondary school education is provided through community-based comprehensive schools. Overall, in 2018 there were 26 fewer schools than in 2017.

Education is the biggest local government service in Wales, with budgeted revenue expenditure of �2.6bn in 2018/19 accounting for 32% of total budgeted expenditure.

The Welsh Government provides funding to local authorities for pre-16 provision in schools through the local government revenue settlement. Local authorities are responsible for the planning, organising and funding of maintained schools in their area according to local needs and priorities.

Local authorities set budgets for schools according to a local formula and in accordance with the School Funding (Wales) Regulations 2010. The regulations require that 70% of funding for individual schools’ budgets is distributed according to factors which are learner led. Local authorities must consult their schools’ forum prior to setting schools’ budgets.

Post-16 education in Wales

The Welsh Government funds individual further education institutions and local authorities for maintained school sixth form provision. Grant agreements between the government and the institution set out the funds that the government has agreed to pay for post-16 learning, how the funds will be paid and the terms and conditions for the use of funding. This includes monitoring and audit requirements for the use of funds.

In February 2011, the Welsh Government announced a comprehensive review of post-16 planning and funding. A new post-16 planning and funding framework was introduced for the 2014/15 academic year. It focuses on the quality of the learning offer in terms of the outcome for individual learners. Programmes are at the core of the framework with each programme attracting a funding value and having a defined purpose and outcome against which it will be monitored. Only eligible programmes were funded during 2017/18.

Chapter 8

Housing

Local authority responsibility for housing is a function of district, metropolitan and unitary councils and London boroughs. Social housing is provided by different types of organisations:

■Councils, which manage their own housing stock and deal directly with tenants.
■Arm’s-length management organisations (ALMOs), which are separate bodies set up by councils to manage their housing stock and deal with tenants. Councils still own the housing managed by ALMOs but the ALMO takes over its running. There are no ALMOs in Wales.
■Registered providers (also known as housing associations), which are completely separate from councils and are not-for-profit organisations that have their own housing stock. These providers are regulated by Social Housing Regulator.

Housing Revenue Account

Councils with more than 200 social houses are required to maintain a separate account that contains all the income and expenditure relating to their housing stock. This account is called the Housing Revenue Account (HRA) and is essentially an account for a council’s activities as a landlord. The account records the income and expenditure necessary to manage and maintain the housing stock, including major repairs, and associated debt financing charges.

The HRA is a separate or ringfenced account, meaning that funds must be kept separate from other local authority income and expenditure, to make sure that council housing rents are not used to subsidise general council expenditure and that the general council tax payer does not subsidise council housing. Any surplus in year must go to a separate reserve (or working balance) to only be used for the HRA. Councils must not budget for a deficit on their HRA after the working balance is taken into account.

Other local authority housing activity that is not part of its role as a landlord, and which therefore does not fall within the HRA, is paid for by the general fund of the council.

Self-Financing Implementation

Before April 2012, there was a complicated national housing subsidy system. Government estimated the costs and income for each authority based on assumptions about rent levels and the costs of running and maintaining properties. If the assumed costs were greater than the assumed income, then the council would receive a subsidy. If the assumed income was greater than the costs then the council paid negative subsidy over to the government. In the final years of the subsidy system the amount of negative subsidy paid to the government far exceeded the subsidy that the government was paying out. So council rent payers were net contributors to the exchequer.

Since April 2012, when the concept of a self-financing HRA was introduced, each council became reliant on its own rent income to provide and manage council housing. The government calculated the amount of notional (ie theoretical) debt that each council’s HRA could support utilising a 30-year future calculation of its rental income less the notional expenditure for that period. The debt that this sum could support was compared with the government’s view of each council’s housing debt and HRA debts were adjusted to this level, with some authorities taking on extra debt and making an equivalent payment to the Treasury, and others having their debt reduced by the Treasury. The final settlement saw �5.3bn repaid by the government, while �13.4bn was paid to government by local authorities. Since this settlement the government has made a number of significant changes around rent policy, welfare benefits and right to buy that have materially affected the total rental income so the implications have not been those anticipated.

Income and Expenditure

If considered purely as a business, council housing in England is worth about �9.5bn annually, with tenants funding the majority of this via their weekly rent, which for 2016/17 was �87.20 on average.

The rent restructuring programme began in 2002/03 and was meant to last ten years. The aim was to bring council rents more in line with those of housing associations. This was done by setting targets known as formula rents. Formula rents are based on local earnings levels and property values and are increased annually at half a percent over the rate of inflation (as measured by the Retail Price Index) because rents needed to increase by more than inflation in order to catch up with housing association rents. The scheme was made more complicated by rules on the amount any individual tenant’s actual rent could increase and by rent caps based on the number of bedrooms in a property. As part of the 2013 spending round the government announced that from 2015/16 social rents would rise by Consumer Price Index (CPI) plus 1% each year for ten years. Guidance released in May 2014 confirmed that the government would end the rent convergence policy in April 2015.

In an unexpected development, the Summer Budget in July 2015 then announced a rent decrease of 1% a year for the next four years to be implemented by housing associations and local authorities and the immediate cessation of rent restructuring. It is estimated that these changes reduce the income receivable over the remaining years of self-financing by around 15%. However, after many had expressed concern over this loss of income, in October 2017 the government confirmed that for the five years from 2020, social rents would increase at a rate of CPI. The implications of these reductions and the consequences of the findings from the disastrous fire at Grenfell on the business plans and future building projects of the sector in the long-term are not yet clear; but in the shorter term there has been a focus on safety work at the expense of new build.

Local housing authorities may also make separate service charges to tenants for those services, such as a concierge service or communal aerials, which are not available to every tenant. In some accommodation there are communal heating systems, the costs of which councils recover from individual tenants by separate charges. Separate services may also be levied for services such as individual garages or parking spaces.

HRA Business Plans

All the changes explained above have demonstrated that business planning for the HRA is critical. Housing authorities must be able to show that they can afford to maintain their housing stock and provide services to tenants over the long term. The HRA business plan looks at long-term investment needs, covering 30 years. In preparing the business plan, councils need to assess the right balance between expenditure on long-term planned maintenance and the more reactive repairs when things go wrong. Self-financing gave councils more freedom to balance this relationship to achieve the best value for money, but the changes to income and the restrictions on how much councils can borrow for housing limit a council’s ability to invest in social housing in its area. For these reasons, business plans should be regularly reviewed.

Housing Allocations

Local housing authorities often work with local housing association partners, operating joint waiting lists and allocation policies. This is a function financed by the general fund of the council. Allocation of Accommodation: Guidance for Local Housing Authorities in England (2012) sets out the factors that councils should take into account in framing their allocation scheme to offer a choice of accommodation to applicants. It included guidance on the freedoms introduced by the Localism Act 2011, which gave local housing authorities more flexibility in deciding who is eligible to go on to their waiting lists. Certain categories of applicants (such as returning members of the armed forces) are eligible for inclusion.

Councils are able to offer flexible two-year tenancies in addition to traditional secure tenancies. The government is yet to announce any timescale for the implementation of the fixed-term tenancies policy that was part of the Housing and Planning Act 2016.

Homelessness

Housing authorities are required to provide advice and assistance to homeless people or those in danger of becoming homeless. The cost of this activity falls on the general fund of the council. They also have to provide accommodation to people who are unintentionally homeless and in priority need. This has generally been through providing initially temporary, often expensive and private, accommodation before moving into council or housing association housing. Under the Localism Act 2011, councils can now also offer a year’s good quality private sector tenancy to fulfil this requirement.

Housing authorities must maintain a homelessness strategy. A revenue grant allocation is made by the MHCLG to help housing authorities meet their homelessness duties.

The Homeless Reduction Act 2017 refocused English local authorities on efforts to prevent homelessness, including an extension of the period during which an authority should treat someone as threatened with homelessness from 28 to 56 days.

welfare reform and housing Benefit

Housing benefit was estimated to cost �21.9bn in 2017/18 and has been identified by central government to be a prime area for spending reductions. The government’s answer was to make a series of adjustment to benefits and in the longer term introduce universal credit, which replaces most housing benefit and a number of other benefits.

Universal credit was due to be implemented fully by 2017, but because of its complicated nature the latest predicted rollout is 2023. Many tenants moving from housing benefit to universal credit are finding that their arrears are increasing and a review undertaken by the NAO argues that universal credit is more expensive to administer than the benefits it replaces.

Right To Buy

Since the 1980s, around 2 million council properties have been sold under the right to buy scheme, nearly 50% of the (then) total. The recession and tighter rules on discounts caused the volume of right to buy sales to fall away considerably in later years and in 2011/12 just 3,080 sales were completed, generating capital receipts after discount of �238m.

In 2012, however, the government raised the discounts in England to increase or ‘reinvigorate’ right to buy sales with receipts from sales (after allowable costs, repayment of housing debt and currently forecast receipts for councils and central government) used to replace the additional homes sold as a result of the higher discount levels.

The MHCLG has reported that over 50,000 homes have been sold since its reinvigoration of the right to buy discounts. Councils may retain some right to buy receipts subject to specific rules set out by the government (see Reinvigorating Right to Buy and One-for-One Replacement Consultation: Summary of Responses and Government Response, 2012).

Housing association tenants have been promised that they will be allowed to buy their own homes following a voluntary agreement between the National Housing Federation and the government. In the November Budget of 2017, it was confirmed that government will proceed with a �200m large-scale regional pilot of the right to buy for housing association tenants in the Midlands.

The Housing and Planning Act 2016 suggests that this should be funded by forcing local authorities to sell off their higher value council houses as and when they become vacant. Details of how this would operate still have not been released. The various housing ministers have been made fully aware how this ‘threat’ is impeding local authorities from being fully committed to building new homes.

Leaseholders

Because of right to buy, many former council estates are now a mix of tenanted property and owner occupation (many of whom are leaseholders). Local housing authorities try to ensure that leaseholders pay their fair share of estate costs (for services such as maintaining lifts) in order to avoid unnecessary expense to the housing revenue account. However, the rules on recovery are complex, especially where major works are concerned, such as re-roofing a block of flats.

For five years after a right to buy sale is completed, only works identified in the sale documentation can be recharged to leaseholders. Leaseholders have statutory rights to loans if works exceed a certain value, and councils can operate more generous local loan schemes.

Gypsies And Travellers

Local housing authorities and county councils provide and operate sites for Gypsies and Travellers.

Empty Homes

Of the 24 million UK homes 200,000 have been empty for over six months. Local councils have a key role in identifying empty homes and working with owners to bring them back into use. The New Homes Bonus is a grant paid by central government to local councils to reflect and incentivise housing growth in their areas. It is based on the amount of extra council tax revenue raised for new-build homes, conversions and long-term empty homes brought back into use. There is also an extra payment for providing affordable homes.

Private Sector Licensing And Houses In Multiple Occupation

Councils must keep the housing conditions within their area under review. Under the Housing Act 2004 a housing health and safety rating system is used to determine whether the authority needs to intervene. Local councils may decide to introduce a licensing system for specific categories of rented property. A common problem found in many local areas is the overcrowding and increased fire risks associated with housing in multiple accommodation.

Sheltered Housing

Local housing authorities provide sheltered supported or extra care properties. Some of this accommodation is hard to let, and councils find it difficult to identify funding for modernisation. Yet expenditure on sheltered housing can mean larger savings on care homes and other more costly support.

The need for sheltered housing is increasing as the country’s ageing population grows, while the profile of users is altering with regard to vulnerability (eg substance abuse).

A proposal to apply the local housing allowance in sheltered housing was widely condemned in the sector and during Prime Minister’s Questions on 25 October 2017. Theresa May announced that LHA rates would neither be applied to supported housing, nor would they be applied to general needs social housing. Instead a ‘flexible funding model’ would be brought forward for the sector. The government intends that all long-term supported housing will remain within the welfare system, but a separate system will operate in respect of short-term supported housing and has consulted on this, but its final plan given the sector’s response has not been published.

Decent Homes Standard

The Decent Homes Standard sets out, essentially, that all homes should be warm, weatherproof and have reasonably modern facilities. It applies to social rented housing (predominantly council or housing association housing).

The broad principle is that a home must have reasonably modern facilities. The specified requirements are as follows.

The home must meet the statutory minimum standard for housing (under the housing health and safety rating system). It will therefore not have any safety hazards (such as a sub-standard gas heating boiler).

It must be in a reasonable state of repair. No key building component should be too old and need replacing. (Key building components are items such as walls, roof, windows and the heating system.) Not more than one other building component should need replacing.

It must have reasonably modern facilities and services. In particular the kitchen should be less than 20-years old and the bathroom less than 30-years old. Not more than two of the main facilities may be too old.

It must provide a reasonable degree of thermal comfort. This means an efficient heating system, and good insulation.

Many councils achieved the Decent Homes Standard for their housing by 2012. However, the self-financing settlement did not contain sufficient resources to enable councils to achieve the standard if they had not already done so. The government allocated a further �160m investment in the decent homes programme, targeted at those councils with the biggest backlogs of repairs, in the 2013 spending review. The term ‘decent homes plus’ refers to environmental and estate works that go beyond the narrow purpose of decent homes.

As of 1 April 2017, there were 79,600 ‘non-decent’ local authority owned dwellings across England.

The HOUSING White Paper – Fixing THE Broken Housing MARKET

Issued early in 2017, this White Paper consulted on a move away from an emphasis on home ownership and detailed the government’s view on how the current housing crisis can be addressed via a number of key initiatives. These included proposals to simplify the planning system, to ensure permissions granted are acted upon, to bring small and medium sized builders back into the market, working with local authorities to help them build and to address the need for starter homes. The government’s response to this consultation is awaited.

In the meantime, the chancellor announced in the Autumn Budget of 2017 that there would be �1bn of extra borrowing capacity given to HRAs. This was clarified in June 2018 with the money being available over a three-year period and at least 50% of it going into London. It is also only available to high affordability pressure areas, defined as those where there is a difference of �50, or more, per week between average social and private rents at the local authority level. This means that around 45% of local authorities are not eligible to apply for the extra borrowing.

The Grenfell Fire

On the evening of 14 June 2017 a fire broke out in the 24-storey Grenfell Tower resulting in 72 deaths. It is the worst UK residential fire since the Second World War. A Housing Green Paper focusing on the issues for tenants following from the disastrous fire was published in the summer of 2018. The Independent Review of Building Regulations and Fire Safety: Final Report (2018) has already ruled out an outright ban on combustible cladding, which is believed to have spread the fire. Social housing has been pledged �400m from the government to fund the replacement of the dangerous cladding and this funding will be available to those who have already undertaken the work. In response, local authorities have looked to replace certain cladding, consider sprinkler systems and other safety issues such as fire doors and ‘stay put policies’. Undoubtedly at the conclusion of the current Grenfell Tower Inquiry there will be other actions that local authorities will need to undertake.

Chapter 9

Social care

Social care is a function carried out by county, metropolitan and unitary councils and London boroughs. Social care has long been, after education, the second largest area of expenditure within councils and the largest under effective local control. With the increase in academies, changes to education funding and the rising demand for social care, it is likely that social care will become the largest service provided through councils. The budgeted net current expenditure in relation to adult social care for England in 2018/19 is �16.1bn. For children’s social care, the total is �8.6bn, making the total budgeted net expenditure for social care �24.7bn.

Adult Social Care

Adult social care includes services for older people (65 and over) and a wide range of services for those in the 18 to 64-years age group.

While services for older people and for adults with learning disabilities remain the largest elements of the adult social care budget, accounting and reporting arrangements have recently been amended to focus more on the nature of support required rather than the age group supported. This allows a more sophisticated analysis of future spending patterns.

Other adult care services include those for people with physical disabilities, sensory impairment and mental health needs, and asylum seekers.

Demand-led pressures

Adult social care is a demand-led service. This means that if a person is assessed as needing care and that care is within the eligibility range set by the national rules introduced by the Care Act 2014, then the person must receive that care. Historically, this has made social care one of the most difficult budgets to manage. The key actions are:

■to fund and encourage preventative support in the community to reduce the chances of people requiring individualised help
■where such support is needed, to intervene early enough in a client’s care to prevent long-term admission to residential care, which is an expensive commitment
■to use short-term intensive reablement packages to return people to independence following hospitalisation, and so avoid long-term support where possible.

The large growth in the population aged over 65 and especially over 80 has increasingly focused the attention of both local and national government on the demands on adult social care, particularly long-term care. That, together with reductions in government grants to local authorities, has led councils to implement a wide range of savings measures.

Pressure on social care budgets

In its Autumn 2016 Budget submission, the Local Government Association (LGA) assessed the demand on adult social care budgets in England to rise from �14,380m in 2016/17 to reach �17,833m in 2019/20 – additional pressure of about �3.5bn.

The government responded to this assessment by permitting council tax increases for social care which are additional to any general increase for which referendum requirements still apply. So, from 2016/17 social service authorities could increase the council tax by an extra 2% per year with no referendum requirement, provided the additional income raised is dedicated to social care. This will yield �400m per year if all authorities choose to implement it, ie an extra 1.8% on current budgets for social care. There has been a broad consensus within local government that this is helpful, but not in itself sufficient to enable rising social care demand to be met. There was also criticism of the distributional aspects.

The government responded to some of these comments with further measures:

■The council tax precept for social care, while still required to average no more than 2% per year over the three-year period from 2016/17 to 2019/20, could be frontloaded by being set at 3% in 2017/18 and 2018/19.
■Additional direct funding was provided of �1.2bn in 2017/18, rising to �2bn by 2019/20 (after which the Improved Better Care Fund will, as explained below, provide the mechanism for a similar level of funding). This additional funding is skewed towards those authorities with the lowest tax bases – who are both able to raise proportionately less money through the social care precept but are likely to face the sharpest increases in social care demand.

Paying for care

The charging systems in England and Wales follow similar principles.

Residential care is means tested and based on a national system in each area. Capital assets such as property are taken into account after 12 weeks when the residential stay is permanent. If a service user has sufficient resources, they will pay for the full cost of the service until their resources fall below a certain limit. Charging for non-residential services is discretionary and the policy is determined locally within a nationally set framework. Generally, for these services property is not taken into account.

The Care Act 2014 incorporated plans to introduce, from April 2016, a �72,000 cap on care costs in England. This would have limited the amount anybody would pay for social care over their lifetime to �72,000, although for anyone in residential care, this would not include living costs such as food, energy bills and accommodation. In reality, the care cap was only likely to directly benefit those with high care needs over a long period. Importantly though, by reducing the impact on those individuals, it would have mitigated the concern of everyone that they too might fall into that group later in life. In July 2015, however, the government announced a delay in implementation from 2016 to 2020, in the light of perceived difficulties with practical implementation and cost.

During the 2017 general election campaign, the prime minister indicated that a cap would be introduced, but that the amount at which it would be set was to be reviewed. Further potential changes were announced, to be incorporated into a planned Green Paper on the financial system for social care, including taking property assets into account for home care as well as residential care through a system of deferred charges, and raising the limit below which charges do not apply from �23,250 to �100,000.

The Welsh Government is currently considering its approach to the cost of long-term care and whether a cap on residential care costs should be introduced in Wales.

Children’s Social Care

Budgeted net expenditure for children’s social care in England for 2018/19 was �8.6bn.

Looked after children account for the largest proportion (49%) of this expenditure, safeguarding is the second largest element at 24%, followed by family support services at 12%. Other services include Sure Start children’s centres, youth justice work, services for young people and support for asylum seekers.

Children’s social care is, like adult social care, demand led. If a child is placed into a local authority’s care, then that child must be supported, with residential placements being the most expensive. As with adult social care, the policy focus is to intervene early in order to both prevent expensive admission into care and provide better outcomes for children in their own homes.

The government estimates that �8bn is spent on 120,000 families with multiple problems that can furthermore continue across generations. A consequence of this complexity is that support has often been uncoordinated, reactive and costly to a range of public services such as police, local authorities, health, housing and probation. The government therefore invested in a national Troubled Families Programme, offering incentives to all upper-tier authorities to turn around the lives of this specific group of families.

The LGA Autumn Budget Submission 2017 described the children’s social care system as ‘being at breaking point’ and assessed the funding gap for children’s services by 2020 as some �2bn. The submission went on to say that unless urgent action is taken to reduce the number of families relying on the children’s social care system for support, this gap will continue to grow. An analysis by the LGA has shown that in 2015/16, 75% of councils had no choice but to overspend on their children’s services budgets by more than �0.5m each. Collectively, the overspend on children’s services across councils in 2015/16 was some �605m.

Health and Social Care Integration

While community budgets have been the primary driver for integration in children’s services, the government has more recently sought to boost the pace of integration in adults’ services through new initiatives.

In 2015/16 the Better Care Fund (BCF) required at least �3.8bn to be used to advance integrated transformation of health and social care. The government encouraged additional contributions to be made through local decisions, and the final fund was originally to have totalled �5.3bn by 2020. Further funding was subsequently announced, however, in the Spring 2017 Budget which will now see the fund increase to about �5.6bn by 2019/20. This forms the basis for pooled budgets for health and social care to work more closely together in local areas, based on plans agreed between the NHS and local authorities. It has been described as “the biggest ever financial incentive for councils and local NHS organisations to jointly plan and deliver services, so that integrated care becomes the norm by 2018” (GOV.UK, 2013).

The BCF offers a real opportunity to address immediate pressures on services and lay foundations for a more integrated system of health and care delivered at scale and pace. But it will create risks as well as opportunities. The �3.8bn was not an addition of new money into the social care system, leaving the organisations commissioning services to make important decisions about how the funding transfer can make a positive difference to social care services and outcomes for service users.

Clinical commissioning groups and councils had to jointly agree plans for how the money will be spent. These plans must meet certain criteria and must be signed off by health and wellbeing boards and NHS England.

Consistent with that approach, in 2015 the government agreed a �6bn plan to devolve all health and social care in the Manchester conurbation to local control. Further agreements have followed, and though not all have incorporated joint working with health, this could well provide the major part of the future template for integration. The government required all local health and social care economies to submit, by 2017, plans for how they will pursue full integration by 2020.

Sustainability and transformation plans (STPs) were announced within the NHS planning guidance in December 2015. They are integrated place-based plans for the future of health and care services in each of the 44 areas into which England is split. The plans are for the five-year period 2016/17 to 2020/21 and they cover all aspects of NHS spending. Social care is not necessarily covered directly, but is seen as a critical consultee and part of the overall picture. All 44 plans – as submitted in draft in October 2016 – are now publicly available for consultation and ongoing development.

There is no equivalent central requirement for STPs in Wales, where there are seven local health boards (with no purchaser-provider split) and 22 local authorities. The Welsh Government asked local authorities to merge voluntarily but with little result. Local examples of integration, such as the Gwent Frailty Programme, present a potential way forward, with the health board and five local authorities pooling their budgets, and such initiatives could lead to developments akin to STPs.

Chapter 10

Police

Policing in England and Wales was radically reformed in 2012 with the introduction of police and crime commissioners (PCCs), who are responsible for commissioning police services in their areas as well as services related to crime and anti-social behaviour. This means that they are responsible for setting the overall budget for police services and setting the priorities and objectives for policing for their local areas.

The PCC is a directly elected individual. The chief constable remains responsible for delivering policing in their area in accordance with the budget, priorities and objectives set by the PCC. The PCC holds the chief constable to account for delivery. Both the PCC and the chief constable have been established as separate organisations, which has implications for police finance.

There are special arrangements in some areas. In London the mayor has responsibility for policing, apart from in the City of London, which has a police committee for its police force. The creation of a metro-mayor in Greater Manchester from May 2017 meant that a separate PCC in Greater Manchester no longer exists as the mayor has taken over this function within the Greater Manchester Combined Authority (GMCA). The chief constable remains a separate legal entity, accountable to the mayor as PCC.

The Policing and Crime Act 2017 allows PCCs to take on the governance of their local fire and rescue service(s), and become a fire and rescue authority. Some PCCs have already done so, or have received authority from the home secretary to do so. The Act also allows a PCC to potentially merge their local police force and fire and rescue service into a single employer with a single chief officer reporting to the PCC.

Expenditure and Budgets

Total funding for policing for 2018/19 was �11.3bn in England and Wales, excluding national Home Office reallocations. From April 2013, policing has been paid for by a mixture of council tax and Police Grant received from the Home Office. Police are not part of the localisation of non-domestic rates regime (see Chapter 1) but are affected by the localisation of support for council tax. The PCC is responsible for setting the council tax for policing for their area (ie police precept) as well as the overall police budget. Where a PCC takes on the governance of a local fire and rescue service to become an FRA, they are responsible for setting the council tax for fire and rescue in their area (ie fire precept).

Financial Management

The Revised Financial Management Code of Practice for the Police Forces of England and Wales and Fire and Rescue Authorities was updated in 2018 by the Home Office. It sets out key principles that PCCs and chief constables must follow as well as a protocol for how the two organisations work together. It also covers the situations where a PCC takes on the governance of its local fire and rescue service, or creates a single-employer, and the situation for the GMCA. The PCC must decide how much financial freedom to give to the chief constable, and this will vary from area to area. There are, however, a few important principles that must be followed.

■Responsibility for setting the policing precept must stay with the PCC.
■The PCC retains responsibility for the police fund (this is the equivalent of the general fund in councils and manages all income and expenditure and reserves that are the ultimate liability of the council tax payer).
■The chief constable can only borrow money with the consent of the PCC and only for the short term and cannot enter into credit arrangements which are transactions giving rise to a liability other than that to repay money, so that all borrowing for capital investment is undertaken by the police and crime commissioner.
■Initially, all liabilities for employees remained with the PCC, but in April 2014 staff and some assets were transferred to chief constables under what is known as ‘stage two’ transfers. The extent of stage two transfers varied from area to area.

It is important that individual PCCs pay careful attention to the financial arrangements they put into place as there is no single solution. They will have to implement arrangements that reflect local circumstances.

Statement of Accounts

Both the PCC and the chief constable will need to produce their own statement of accounts. The PCC then has to bring these together into something called the group accounts, which show the total costs of policing for the whole area. The individual accounts of the PCC and the chief constable will each have a large single item relating to money passed from the PCC to the chief constable; these will cancel each other out in the group accounts. Where a PCC takes on the governance of their local fire and rescue services, the fire and rescue authority accounts are not part of the group relationship with the PCC or chief constable’s accounts.

Glossary

Accounting standards	Rules set by the International Accounting Standards Board that set out how transactions are to be shown in an organisation’s accounts.
Accrual	The recording of income and expenditure when it becomes due rather than when cash is paid out/received.
Aggregate start-up funding assessment	The amount of central government money to be allocated to local government to calculate the start-up position for the non-domestic rate localisation system.
Annual statement of accounts	An annual statement setting out the income and expenditure of the council along with its assets and liabilities.
Arm’s-length management organisation	An organisation set up by the council to manage its council housing on its behalf.
Audit committee	A special committee of the council that reviews the financial management and accounts of the council.
Balance sheet	A statement showing the assets and liabilities of the council.
Baseline funding level	The proportion of the start-up funding assessment to be funded from locally retained business rates.
Billing authorities	District, unitary, metropolitan and London borough councils who collect council tax and non-domestic rates on behalf of all local councils.
Budget requirement	The amount a council needs to fund its spending from council tax, non-domestic rates and Revenue Support Grant.
Capital budget	The money a council spends on investing in new buildings, infrastructure and expensive pieces of equipment.
Capital financing charges	The amount a council has to pay to support its borrowing to pay for the purchase of major assets.
Capital receipt	The money a council receives for selling assets that can only be used to repay debt or for new capital expenditure.
Cash flow statement	This statement summarises the cash flows that have been made into and out of the council during the year.
Chief financial officer	The most senior finance person in a council responsible for ensuring the proper financial management of the council.
Code of Practice on Local Authority Accounting in the United Kingdom	A code produced by CIPFA/LASAAC that sets out how councils should show transactions in their accounts and the format of the accounts.
Collection fund	An account used by a billing authority to pay in the council tax and non-domestic rates it collects and to pay the income to itself and its major preceptors.
Community budget	A budget created by a number of public sector organisations combining their resources.
Comprehensive income and expenditure statement	This statement shows all the income and expenditure of the council.
Council tax	A tax paid by local domestic households to their council.
Dedicated Schools Grant	A grant that has to be used by councils to fund schools.
Deficit/surplus on the collection fund	The difference between the amount of tax estimated to be collected and the amount actually collected.
Depreciation	The charge to the comprehensive income and expenditure statement for the use of assets.
Earmarked reserve	Money set aside for future use on a specific area of expenditure.
Estimated business rate aggregate	The total amount of business rates that the government estimates will be collected by councils in total.
External audit	An external review of the council’s accounts and systems.
Funding formula	A mathematical formula based on population, deprivation and other local indicators to allocate the aggregate start-up funding assessment between individual local councils.
Governance	The framework by which a council can gain assurance that it is setting and achieving its objectives and ensuring value for money in the proper way.
Housing revenue account	An account used to record the income and expenditure related to council housing.
Internal audit	An internal review of the organisation’s systems to give assurance that they are appropriate and being complied with.
Levies	Amount collected by special-purpose bodies from councils, including flood defence and in some areas public transport.
Levy (non-domestic rates)	A proportion of non-domestic rate growth above inflation that a council has to pay into the central pot.
Local councils or local precepting bodies	Parish, town and community councils.
Local government control total	The amount of the overall public spending envelope the government decides should be spent by local government.
Local government finance settlement	The annual announcement by the government and the Welsh Government on the amount of resources they will give to local government.
Major preceptors	County councils, the Greater London Authority and police and fire authorities who collect their share of council tax through a precept on their billing authority.
Movement in reserves statement	This statement shows the impact of the financial year on the council’s reserves.
Net revenue expenditure	The amount a council spends on providing services after capital financing costs and specific government grants are taken into account.
Non-domestic rates	A tax paid by local businesses to their council.
Precept	The total amount of council tax county councils, the Greater London Authority and police and fire authorities require billing authorities to collect on their behalf.
Principal local authorities	County councils, district councils, unitary councils, metropolitan councils, London boroughs, the Greater London Authority and police and fire authorities.
Proportionate shares	An individual council’s estimated share of the estimated business rates aggregate based on the proportion of the total business rate income it has collected over the past two years.
Provision	Money set aside against a specific future liability.
Prudential Code for Capital Finance in Local Authorities	A code produced by CIPFA that councils are required to follow when deciding upon their programme for capital expenditure.
Pupil premium	An amount that is paid to schools by the government for each of their pupils that are classified as deprived.
Registered provider	A not-for-profit organisation that provides social housing.
Revenue budget	The amount that a council spends on its day-to-day running of services through the financial year.
Revenue Support Grant	General grant paid to councils by the government to support their expenditure.
Right to buy	The right of council tenants to buy their council houses at a discount.
Ringfencing	A term for the earmarking of money (eg a grant or fund) for one particular purpose, so as to restrict its use to that purpose.
Safety net	Funding from the central non-domestic rates pot that is used to support councils whose rate income has fallen by more than 7.5% in any one year.
Schools funding formula	The formula that is used to distribute funding between individual schools.
Specific government grants	Grants given to councils by central government to fund specific services or projects.
Standard spending assessment	An individual council’s share of the local government spending control total for Wales.
Start-up funding assessment	An individual council’s share of the aggregate start-up funding assessment as calculated by the funding formula.
Top-up and tariff	The amount of local non-domestic rate income that an individual local authority has to pay in to/receives from the central pot.
Total service expenditure	The amount a council spends on providing services before capital financing costs and specific government grants are taken into account.
Trading account	An account used to record the income and expenditure of a part of the council that is engaged in trading activities.
Treasury management	The management of the cash balances and borrowing needs arising from the council’s cash flows.
Treasury Management Code	A code produced by CIPFA that councils are required to follow in managing their treasury management activity.
Treasury management strategy	An annual document approved by full council that sets out how a council will manage its cash and borrowings.
Valuations office agency	The government agency responsible for valuing domestic and non-domestic properties for local tax purposes.