Reserves are not the answer

By Paul Dossett | 11 September 2018
  • Paul Dossett

In February 2018 Northamptonshire CC issued a Section 114 notice banning all new expenditure on non-statutory services. This announcement has been a catalyst in bringing the ongoing financial issues facing local authorities to light. The sense that local government finances are on the brink is firmly entrenched within local government after a decade of austerity but, until Northamptonshire, the issue had failed to attract much attention outside of the sector.

Analysing councils’ use of reserves is key to starting to understand their financial position and sustainability. Data recently released by the Ministry of Housing, Communities & Local Government (MHCLG) shows that, of the 439 authorities analysed, reserve levels have actually increased by £460m in the past year. While this may seem surprising, this increase has not been experienced equally by all local authorities and varies both by geography and by authority type.

Kensington & Chelsea RLBC drew the most funding from its reserves last year. This is not surprising and can be directly attributed to the Grenfell tragedy. The council was required to use its reserves in order to fund its response to the tragedy and manage the unexpected cost.

Responding to unexpected events is one of the main purposes of local authority reserves – along with earmarked reserves for funding planned one-off events, such as transformation – and sudden tragedies, such as Grenfell, demonstrate just how vital it is for councils to have reserves.

If reserves continue to be used as they are currently – to fund ongoing service delivery and ensure financial stability – we run the risk of councils not having the necessary resources available to respond effectively in the future.

The local authority that made the largest contribution to their reserves during 2017/18 was Birmingham City Council, adding £94m to its reserve pot. This was made possible by the creation of a Financial Resilience Reserve, which emerged from a change in the Minimum Revenue Provision policy, and back-dating this to 2007/08.

Increasing demand for social care, and the resulting budget pressures, is seen as a key factor behind the growing use of reserves by local authorities, as many will be relying on this funding to ensure continued service delivery. One would expect unitary councils and county councils to have the greatest use of reserves.

However, the MHCLG data shows that across these local authorities reserve levels have actually increased by approximately £110m. Looking at county councils, there are six authorities that have dipped into their reserves in excess of £10m, while five have actually increased their reserves in excess of £10m.

It is clear there is no ‘one size fits all’ when looking at a council’s statutory requirements and resulting financial issues, and every local authority is different. As shown by the Northamptonshire experience, there are a multitude of influencing factors that can cause a council to reach a financial tipping point.

For London boroughs, reserve levels peaked in 2014/15 and have since declined year on year. It is a similar story for county councils who have also seen their reserves reduce year on year from 2014/15. In contrast, district councils have seen their reserves increase year on year from 2010/11 on a consistent basis.

The severity of the financial challenges facing local authorities varies depending upon the type of authority and that, in general, those councils with social care responsibilities do appear to be under the greatest financial stress – although there will always be exceptions.

Northamptonshire CC has become the byword for financial problems in the local authority sector. The decisive factors resulting in Northamptonshire’s financial issues have been identified as council leadership, financial discipline and management practice. Local authorities who are becoming increasingly reliant on reserves to prop-up financial performance need to be aware of the risks and learn lessons from the Northamptonshire experience.

Although it has been met with some criticism, the proposed CIPFA Resilience Index acknowledges just how important it is that councils’ financial sustainability levels are measured and monitored regularly.

So, what do we see the future looking like for local authorities?

The Business Rates Review and Fair Funding Review being undertaken by the MHCLG will be critical to determining future funding within the sector. The Fair Funding Review offers a clear opportunity for local government to achieve a better settlement but it is also inevitable there will be winners and losers. The pre-agreed funding for the NHS is also likely to dampen the amount of additional funding that can make its way to local government.

Alongside the Fair Funding Review we call on central government to undertake a radical reform of funding and financing for the local government sector to empower local authorities. Fiscal devolution including local taxation, progressing business rate retention, lifting the housing borrowing cap and tourism tax are all tools that would equip local authorities with the power to respond locally to funding issues, and work towards increased financial sustainability, thereby limiting their reliance on reserves.

Paul Dossett is head of local government at Grant Thornton UK

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