Sadly on a few too many occasions over the last couple of years I have heard warnings from CFOs that their council may soon face an untenable budget position, resulting soon after in their redundancy with the role relegated to a lower tier. Mainly these councils now appear on listings of those causing concern.
Since 2010, local government has borne the brunt of austerity, leaving a landscape of reduced spending power, increased financial risk and overall uncertainty. My advice to council leaders and chief executives though is not to shoot the messenger in the belief that a spectrum of narratives from obfuscation to innovation alone will ease the problems.
For the medium term, good councils are growing their income streams and tax bases, building resilience through reserves, managing demand, integrating services, moving to new delivery models, sharing and digitalising services and reducing what the council provides. And for the medium term the Government is helping with space for 3.99% council tax rises, business rate retention, the Better Care Fund, four year settlements, devolution deals and scope to capitalise transformation costs.
But, good councils will also attest that good medium-term strategy is no substitute for short-term grip.
Councils are permitted to draw on revenue reserves to support the revenue position, and so effectively can run a deficit on current spending in a year if they have the means to fund it. But it is illegal for planned expenditure in the current or a future year to exceed budgeted resources and available reserves. In such cases the CFO must statutorily enforce an expenditure freeze and the council respond and adjust its plans for the year in question.
CIPFA’s view is that DCLG assumptions on tax base growth and council tax increases will not fully materialise and so the ‘spending power’ gap for the sector is greater than stated. And the surprise redistribution of remaining grant funds will leave some councils worse off in the short-term than they estimated.
Private hints from DCLG to some council leaders that in future they will be allowed to run deficits beyond the present rules are, in my view, empty promises as this would require primary legislation.
If councils find no further room to manoeuvre, CFOs will increasingly have to look to emergency measures. However, though a last resort, voluntary or enforced spending freezes should not be seen as failure. They are part of the control mechanism for the corporate centre to exercise control on service spending where chief officers and cabinet members cannot do so.
In effect any expenditure, for example all recruitment or capital works, must be prior-approved by the CFO (usually via a panel with the CEO) and urgent expenditure explicitly delegated to service chief officers, for example to make care placements, will be scrutinised. Voluntary spending freezes are effective, especially when they are tough, council-wide, and with low thresholds for reporting, say £50 or more requiring CFO approval.
If not assured a s114 notice by the CFO, and with advice from the monitoring officer, removes the voluntary nature of such arrangements and the authority’s full council must meet within 21 days to consider the notice. During that period, the authority is prohibited by law from entering into new agreements involving spending. If the CFO does not act when they should, the external auditor has a duty to issue an advisory notice.
Of course, as a regulated professional accountant a CFO may lose their licence to operate if they fail to act. At any one time, for example, from our membership of 14,000 CIPFA usually has circa 40 ongoing independent investigations where a variety of complaints have been received. Sanctions imposed regularly involve suspension of removal from membership.
CIPFA’s report The Role of the CFO in Local Government identifies the principles that define the core activities and behaviour we expect from a CFO which include duties to protect taxpayers. Given the context for the sector, we will now publish by April 2016 a guide to spending freezes and use of s114 regimes for organisations to use if needed.
If confronted with dire financial circumstances, my advice is to confront the issues head on as expected by law. Whether right or wrong, unlike other public sector bodies councils have no discretion to spend money they don’t have.
Rob Whiteman is chief executive of CIPFA