15% of councils are currently showing signs of financial distress according to the Chartered Institute of Public Finance and Accountancy's Financial Resilience Index.
And, if the rate at which local authorities are now dipping into their financial reserves continues, the National Audit Office estimates that 10% of councils are on course to fail by 2021. Our own figures suggest this could be closer to 20%.
Councils are at risk for a variety of reasons. These include: rapidly increasing costs of demand led services as populations grow and age; the low ratio of locally raised taxes compared to levels of expenditure, which places an increased reliance on government grants; and external challenges posed by wider socio-economic conditions that mean there are less revenue raising options.
Becoming financially sustainable
Local government has endured the majority of cuts in public spending since 2010, yet is continuing to provide vital services through increased innovation and a focus on efficiency. But this can only be sustainable for so long.
For example, an Institute for Government report highlights the pressure that the increase in demand for both adult and children’s social care services has placed on councils. Many have had to move funding from other public services to meet the rising need for social care. But there are very few areas left where further funding cuts can be made without posing a risk to service quality and efficiency. The cost of some services has already started to be transferred to the public, such as waste collection.
So, how do councils get to grips with this situation and turn it around? In order to survive and protect the provision of high quality services, local authorities need to implement financial strategies that provide resilience in the face of demand pressures and create the foundation for a sustainable future.
This will involve some difficult choices, which may not be politically palatable. Financial sustainability needs decisions to be based on clear evidence, robust data and a council-wide view – not just focusing on one area. Decisions also need to be made with an understanding of how income growth can be generated over any given period. Importantly, leaders must be able to recognise which potential strategies may not ultimately be viable.
Robust decision making
Against this backdrop, councils need to develop robust long-term strategies that move them from financial resilience to financial sustainability. To do this, council leaders must:
Understand the common and underlying factors which are more likely to fail in the near term
Develop forecasts and projections to highlight areas of likely financial failure in the longer term
Determine the demand drivers (population, health, economy etc) that are key to creating financial pressures and overspends for their area
Identify the key financial ratios that provide indicators of financial risk for their council
Benchmark themselves against other local authorities to help develop best practice.
All this is critical for strategic council-wide planning – for example, to allow a council’s savings plan for children’s services to be assessed and referenced against the spending levels of their most comparable peers, and against the context of current outcomes and quality measures within their own area.
Councils must also understand their direction of travel on a number of key financial ratios, such as the anticipated proportion of demand-led services in 2025 alongside the proportion of spend that is covered by locally generated income.
To help councils achieve this, we have developed our Financial Foresight model. With a combination of national statistics and local authority data, it offers a robust and comprehensive data repository and platform for evidence-based decisions. This enables us to work with a council’s senior leaders to run scenarios, test policy ideas and model potential investments – the ultimate aim being to identify the optimal mix of financial levers to arrive at a longer term financial strategy. And by looking across a range of socio-economic indicators and spend lines, it is possible to quickly identify a number of areas for further exploration, for example high levels of employment or the challenge around demand for social care if there are more elderly people.
There are plenty of options but, in the end, it is what councils decide to do that matters.
If you want to discuss any points raised in this article or if you are looking for strategic advice to support your local authority, please contact Paul Dossett.