Local Government Reorganisation - The financial planning process and Medium Term Financial Strategy for newly created unitary councils

Funding

MHCLG has confirmed that the funding baseline for a newly created authority will be set by combining the grant allocations of the relevant predecessor councils from the current Local Government Funding Settlement for the year following reorganisation. This means that allocations will not be recalculated based on the newly created authorities and local areas will need to agree the split of funding where there is disaggregation of authorities, with further complexity in those areas where there is also disaggregation of the districts. Early consideration is therefore critical in setting the funding baseline as an agreed approach will give certainty but there is no prescribed approach to achieving this. Local areas need to consider the approach that best reflects the drivers of cost in their area to ensure funding is disaggregated in a way that supports financial resilience and sustainability. Example approaches include:

• Population based approach – this is the simplest approach but is not reflective of relative need
• Relative needs formula – using the components of the funding formula to calculate an allocation for the newly created authority as a standalone authority, which while rigorous has significant complexity and requires modelling
• Link between funding and expenditure – use expenditure disaggregation as the baseline to match funding and expenditure Historic spend apportionment – looks at historic spend profiles to split funding but may reward inefficient operations and embed historic spending patterns, reducing the opportunities created by reorganisation
• Demand allocation – using service user numbers in areas such as social care, with funding allocated in line with this. This will demonstrate a clear link between demand and funding but requires accurate, robust and agreed data
• Negotiated political settlement – a negotiated split between shadow leaders and officers to reach an agreed position. Likely to require facilitation and may not reflect relative need

Early consideration of the preferred approach should be a priority for shadow administrations as there will be significant complexity, both political and operational, that could delay the development of robust financial plans. To support these discussions there may be a need to run above scenarios to compare and contrast the potential outcomes.

Approach to the harmonisation of Council Tax in the newly created authorities will also have a significant impact on funding the MTFS. Early decisions are required and the MTFS needs to include explicit modelling of different scenarios under consideration. Alongside this, an understanding of local Council Tax support schemes is needed as there will be financial and political implications of harmonisation of these schemes that will need to be modelled in the MTFS. This principle extends beyond Council Tax to the wider range of fees and charges set by predecessor authorities, including car parking, garden waste collection, leisure and culture services and planning. Differences in these charges can generate significant public and political reaction if not identified and managed early. The MTFS should therefore include an audit of existing fees and charges schedules across predecessor authorities, an assessment of the financial impact of harmonisation options, and a clear timeline and communications approach for implementation.

Expenditure

Modelling the expenditure baseline for each newly created authority will build on the predecessor organisations to understand the cost of delivering services, before the impact of any financial benefits for reorganisation or transformation delivery in the new authority. The starting point should be the consolidation of the net revenue budgets of the predecessor authorities to create a baseline position. As with funding, where there is disaggregation of authorities, decisions will be need to be made on the approach to disaggregation of expenditure, particularly with social care services where expenditure drivers will vary across each area.  

Predecessor authorities are likely to have different approaches to the modelling of demand pressures for services and developing an early understanding of these approaches, and subsequent alignment of demand modelling in each of the new authorities is key. Planning will also be required around the assumptions on pay and inflation with decisions required on the figures to be used in the newly created MTFS’. Finally, service standards and delivery approaches will differ between the predecessor authorities, this needs to be understood early and decisions made on the approach, understanding financial implications of harmonisation. 

Costs and savings of Local Government Reorganisation (LGR) 

Funding and expenditure provides a baseline for the MTFS of the newly created authority. Alongside this it needs to reflect both the costs and savings of local government reorganisation. The LGR financial planning framework from CIPFA recommends a joint transition cost and savings schedule, developed with consistent templates across all predecessor organisations, with clear separation of transitional and transformational items. It is critical that both the costs and savings are realistic and phased appropriately, as learning from the 2023 cohort of reorganisation highlights the importance of MTFS being reflective of a realistic delivery timescale rather than being overly optimistic. All savings should be underpinned by a clear programme with clear accountability to support delivery.  

Financial Governance 

The MTFS should be as detailed and robust as possible but it needs to be underpinned by a strong governance framework. Key elements that need to be considered in creating this framework include; 

• A common financial control framework, covering delegations, approvals and reporting
• Clear protocols for how the shadow authority's finance function will be resourced and led in the period before vesting day
• Agreement on how financial risks will be escalated and reported across the predecessor organisations during transition
• A programme board with appropriate Section 151 representation and clear accountability for financial decisions
• A savings tracker that reports planned versus actual delivery by workstream that is reported regularly to ensure challenge and accountability 
  
  

LGR and Exceptional Financial Support (EFS) 

LGR aims to create authorities that are financially resilient and sustainable but the challenging financial environment facing local government and the costs associated with LGR mean that, some authorities, may require EFS to support the transition. Whilst effective planning and MTFS development should support creating financially resilient authorities, MTFS’ need to be realistic and if EFS is required then a clear and credible plan needs to be developed on how EFS will be temporary in nature and be repaid in the future.  

Recommendations to consider 

Developing a robust MTFS will be different in each of the newly created authorities but there are a number of similarities that will support successful execution of this process. Recommendations for finance teams and Section 151 Officers delivering this include; 

• If not already established, establish a joint Section 151 working group across all predecessor authorities. This will be critical to information sharing and developing a collaborative approach to finance transition
• Develop a clear baseline of data that is agreed and used consistently across a whole area. This forms the basis of the financial due diligence approach that will be critical in areas such as reserves, debt, liabilities and contracts
• Agree and document key financial principles around reserves, asset disposals, procurement, capital investment and pay policy for the wind-down of predecessor authorities
• Ensure that MTFS planning is a key stage of the shadow authority period as it will allow for it to be stress-tested and different scenarios run across funding, expenditure, transition costs and savings
• Where possible, build specific contingency into the MTFS to cover higher than anticipated transition costs in areas such as IT, contracts and cultural change
• If you think there may be a need for EFS to support the transition, proactively plan for this through discussions with MHCLG and a clear plan for repayment
• Post-vesting day, ensure that there is clear tracking of savings with clear accountability.