Memorandum by Chartered Institute of Public
Finance and Accountancy (CIPFA) (LGB 29)
CIPFA is one of the leading professional accountancy
bodies in the UK and the only one which specialises in the public
sector. It is responsible for the education and training of professional
accountants and for their regulation through the setting and monitoring
of professional standards. Uniquely among the professional accountancy
bodies in the UK, CIPFA has responsibility for setting accounting
standards for a significant part of the economy, namely local
government. CIPFA's members work (often at the most senior level)
in public service bodies, in the national audit agencies and major
accountancy firms. They are respected throughout for their high
technical and ethical standards, and professional integrity. CIPFA
also provides a range of high quality advisory, information and
training and consultancy services to public service organisations.
As such, CIPFA is the leading independent commentator on managing
and accounting for public money.
1.1 In his foreword to the White Paper "Strong
Local LeadershipQuality Public Services" the Prime
Minister described it as setting out "a new vision for local
government at the beginning of the 21st Century. It seeks to establish
a partnership between central and local government, reflecting
the critical importance of local authorities as a tier of democratic
government, delivering high quality public services to local people".
1.2 The Chartered Institute of Public Finance
and Accountancy (CIPFA) welcomes the draft Local Government Bill
as a further step towards making this vision a reality. In particular,
the draft Bill confirms the Government's intention to introduce
a prudential approach to local authority capital investment, replacing
the present statute based prescriptive system of credit approvals.
It introduces wider powers for local authorities to charge for
discretionary services and to trade. The draft Bill also holds
out the prospect of a reduction in regulatory controls and new
powers for some authorities.
1.3 In other respects, however, CIPFA's
view is that the Bill does not move far enough in encouraging
the "new localism" that is key to achieving the Government's
vision. For example, the Bill implies no change in the balance
of central and local funding and signals a further step away from
a return of NDR to local control.
1.4 In summary, CIPFA's views on the draft
Capital finance and accounts
the prudential approach to capital
investment is a positive development but requires a supportive
funding mechanism to deliver better investment;
local authority accounting treatments
proposed in the draft Bill should comply with United Kingdom generally
accepted accounting practice (UK GAAP) wherever possible;
the criteria by which pooled housing
capital receipts will be redistributed from areas of better to
poorer housing will need to be precise and transparent;
the drafting implies that the pooling
power could in addition apply to non-housing capital receipts.
specifying a "minimum level
of reserves" for local authorities is impracticable and should
be left to local judgement and good professional practice;
creating a statutory duty to monitor
local authority budgets is unnecessary and wrongly implies that
a majority of local authorities fail to keep track of their finances
during the year.
"formula grant" implies
no change in the balance of funding and suggests a further move
away from locally determined NDR;
further details on the formula grant
and method of allocation are required before CIPFA can comment
in detail to the Committee.
repayment of "overhanging debt"
only on transfer of housing stock does not appear to be an equitable
use of taxpayers' money or fair to tenants where transfers do
the proposal to redistribute excess
rental income between local authorities also raises questions
Miscellaneous and general
the clearance procedures for allowing
charging for discretionary services are complex and may not encourage
trading powers should not necessarily
be linked to a comprehensive performance assessment (CPA) rating,
in particular for inter-authority trading which will benefit local
government as a whole;
a sophisticated CPA inspection system
that concludes with a simplistic performance categorisation runs
the danger of being discredited as a "broadsheet analysis,
tabloid headline" approach to performance improvement;
removal of regulatory controls and
the granting of additional powers should not be restricted to
already high performing or excellent authorities.
2. CAPITAL FINANCE
2.1 CIPFA welcomes the inclusion of clauses
in the draft Bill that are intended to give effect to the proposals
in the Local Government White Paper to introduce a new prudential
system for capital finance in local government. The new system
will provide a legislative framework that better supports strategic
planning, asset management and proper option appraisal, and hence
facilitates better service delivery.
2.2 CIPFA is pleased to be developing the
Prudential Code that will underpin the new system. However, CIPFA
is concerned that some of the detailed clauses appear to run counter
to the Government's stated intention to take, as far as possible,
standard local authority accounting practices and concepts (which
for the most part are compliant with UK GAAP) as the starting
point. For example, clauses 6 and 7 are worded such that leases
or contracts are credit arrangements unless otherwise specified
by regulation. CIPFA strongly recommends that the new system should
rely on local authority accounting practices to identify long
term liabilities, and also the manner in which these are required
to be charged over time to the revenue accounts of local authorities.
2.3 The Government could have a power to
over-rule these proper practices for specific types of lease or
contract, in a similar manner to that proposed for capital expenditure
in clause 16. Unless this change is made, large amounts of the
detail in primary legislation within the current system will need
to be reproduced as secondary legislation within the new system.
2.4 In the current system, useable capital
receipts may be used either to finance capital expenditure or
to repay debt. The ability to repay debt with capital receipts
provides a useful flexibility and CIPFA would not want this flexibility
to be lost. Therefore, CIPFA would prefer clause 10 1(a) (i) to
be amended to include the repayment of debt as a legitimate use
of capital receipts.
2.5 The explanatory notes on clause 10 1(a)(ii)
indicate that this clause is intended to facilitate the pooling
and redistribution of a proportion of housing capital receipts
"from richer authorities to those in areas with a greater
need for new housing investment". However, if this is the
intention, clause 10 is drawn too widely and could equally be
applied to non-housing capital receipts.
2.6 This clause appears to reduce the incentive
for authorities to transfer their housing stock, particularly
where part of the incentive is to create resources that could
be used to finance the provision of new housing within the local
authority area through registered social landlords (RSLs), or
indeed to help tackle problems of disrepair in the private sector.
To promote equity and fairness, the criteria on which pooled housing
capital receipts are to be redistributed will need to be precise
2.7 In order to comply with UK GAAP, provide
good management information and to ensure the sustainability of
capital investment, CIPFA recommends that depreciation is charged
within the accounts of local authorities and is resourced. If,
instead, the Government chooses by statute (for example by regulations
made under clause 21Accounting practices) to require a
different amount to be charged for the purposes of taxation, then
it is recommended that such regulations are phased out as quickly
as possible and that a commitment is made to this effect. The
full application of depreciation would be consistent with the
Government's fiscal strategy, which treats depreciation as a part
of current expenditure, and with resource accounting.
Government support for capital investment
2.8 In the notes on additional measures
it is stated that there will be a power to make a wide range of
capital or revenue grants to local government. CIPFA recommends
that the prime method of providing government support for capital
investment in local government should be through revenue support.
Capital grant makes capital investment free to the local authority
at the point of delivery. This has adverse effects in skewing
management decisions, which are widely recognised. At a time when
the government has recognised this for its own activities, and
is moving away from a system where capital is "a free good",
it would be at variance to introduce such a system for local government.
2.9 Capital grants can have a valuable role
in, for example, pump priming. However, if they are used a major
source of finance they may result in poorer management decisions,
unsustainable capital investment, increased central government
control and, possibly, rationing. In order to maximise the effectiveness
of the new system, CIPFA recommends that government support for
local authority capital investment be focused on support to the
revenue account, to support future depreciation and interest costs.
3.1 The draft Bill proposes reserve powers
for the Secretary of State to determine minimum levels of reserves
for local authorities. CIPFA concurs with the White Paper statement
that the Government's "preference would be not to make use
of these powers". CIPFA does not accept that there is a case
for introducing such a statutory minimum either as an absolute
amount or a percentage of budget, since only a minority of local
authorities in England are judged by the Audit Commission to have
"inadequate reserves". Such an intervention would run
counter to the promotion of local autonomy and conflicts with
the increased financial freedoms implicit in the draft Bill.
3.2 Local authorities, on the advice of
their chief financial officers, should make their own judgements
on such matters taking into account all the relevant local circumstances,
which will vary between authorities. For example, a well-managed
authority with a prudent approach to budgeting should be able
to operate with a relatively low level of balances. CIPFA considers
that there is no need for additional statutory safeguards to prevent
local authorities from over-committing themselves financially.
Currently there is statutory requirement for local authorities
to set balanced budgets and for chief financial officers to report
to members where there is the likelihood of this not being achieved.
3.3 CIPFA is currently revising its guidance
on local authority reserves and balances for consultation later
this year. In general, external auditors of local authorities
"benchmark" authorities against CIPFA guidance. The
paper will set out the principles by which individual authorities
should consider the adequacy of their reserves, including their
overall financial standing (level of borrowing, outstanding debt,
council tax collection rates); their track record in budget and
financial management; their capacity to manage in year budget
pressures; the strength of their financial management and reporting
arrangements; their virement and end of year procedures in relation
to budget over/underspends at authority and departmental level;
the adequacy of their insurance arrangements to cover major unforeseen
risks; and the effectiveness of their overall approach to risk
management. These factors can only be properly assessed at local
Statutory budget monitoring
3.4 For similar reasons, CIPFA does not
believe that a statutory duty for local authorities to monitor
their budgets in year is necessary. The legal and professional
responsibilities on chief financial officers to carry out this
role and to report to their authorities are sufficient safeguards.
CIPFA has recently issued for consultation a revised version of
its 1999 publication under the title "A Statement on the
Role of the Finance Director in a Modern Local Authority"
which includes good practice guidance on this subject. A CIPFA
Standard of Professional Practice on Budgetary Planning and Control
will provide a further source of good practice when issued this
4.1 The draft Bill includes a proposal to
amalgamate revenue support and redistributed NDR into one funding
stream to be named "formula grant". In our view this
is unlikely to make the approach any easier to understand or explain,
particularly as the term "formula grant" is itself non-descript
and does not communicate to taxpayers the purpose of the funding.
"Local service support grant" would be preferable.
4.2 On a more technical point, the draft
Bill tends to treat revenue, capital and financial management
as separate issues rather than an indivisible whole. The Bill
does not set out how the 'formula grant' will work, yet as long
as it remains the dominant income stream for local authorities,
it is crucial to their financial standing and financial management;
and it impacts directly on the "going concern" concept.
If the prudential capital control system is to operate successfully,
then local authorities must have access to an assured and adequate
level of resources to invest in their assets, whether to replace
or renew existing assets or to provide for new needs
4.3 Although the White Paper included commitments
to establish a high level working group to examine all aspects
of the balance of funding and to reduce the incidence of ring
fenced grants, CIPFA does not detect in the draft Bill or commentary
any movement on these fronts. It is commonly accepted that the
present imbalance compromises local financial autonomy and distorts
the impact of council tax rises as a result of the gearing effect.
Arguably the imbalance affects the ability of local authorities
to be transparently accountable to their electorates for the resourcing
and delivery of local services.
4.4 CIPFA is also concerned that the proposal
to merge NDR redistribution into formula grant will have two disadvantages.
Firstly, it "detaches" the business community, a key
partner with local authorities, from any sense that they are contributing
to the provision of their local authority's services. In the context
of a longer term vision for a "new localism", this is
not a positive development. Secondly, it signals a further step
back from the possibility of returning the business rate to local
authority determination. Certainly this decision does not fit
well with the general framework of freedoms and accountabilities
that the draft Bill professes to support. CIPFA's view is that
this area of the Bill should be revised or at least leave the
possibility open of a change in the funding balance through return
of NDR and/or other measures in the near future.
5. HOUSING FINANCE
5.1 CIPFA has already commented at 2.5 and
2.6 above on the draft Bill's proposals to redistribute housing
capital receipts from "richer" areas to those with a
"greater need" for housing investment. Similar points
about transparency, equity and fairness can be made concerning
the draft Bill's proposals for the government to pay off "overhanging
debt" (ie the outstanding debt owed by an authority where
the capital receipt arising from a LSVT is insufficient to clear
the whole housing related debt) for transferring authorities but
not for local authorities which retain their housing stock.
5.2 From the perspective of the tenant who
remains with the local authority, part of their rental payment
services the historic housing debt rather than being applied to
repairs, maintenance and improvements. The "playing field"
is not level and taxpayers' money is being used in a discriminatory
fashion. There is also a measure of "perverse incentive"
in the proposal as it benefits authorities that have not maintained
their housing stock in the past to a standard where the market
value exceeds the historic debt.
5.3 The "perverse incentive" and
equity arguments also apply to the draft Bill's proposals that
where local authorities generate surplus rental income, even though
incurring management and maintenance expenditure comparable with
other authorities, that the surplus be transferred to authorities
which cannot generate sufficient rent income. While the justification
that such surpluses should no longer benefit authorities' revenue
accounts may be equitable on the grounds that tenants should not
"subsidise" council tax payers, the assumption that
it is equitable for one authorities' tenants to subsidise another's
is not. Arguably, equity would dictate that rents should be reduced
to match expenditure and that redistribution and equity should
be achieved centrally through housing revenue account subsidy.
The assumption behind these proposals seems to be that housing
is a national service and that money from one area can be readily
moved around the country.
Charging for discretionary services
6.1 The proposals for calculating charges
for discretionary services, including limiting charges to the
recovery of costs and the possible capping of charges, seem to
be over-elaborate and not designed to encourage take-up. Leaving
the setting of charges for discretionary services to the market
would seem to be more straightforward, assuming that the local
authority did not have a monopoly on supply.
6.2 The commentary makes clear that the
Government intend the availability of new trading powers to depend
on favourable comprehensive performance assessments (CPAs). CIPFA
hopes however that these restrictions will be flexible enough
to take account of the different levels of commercial risk involved
in different types of trading. Arguably low risk trading should
be open to a wider range of authorities.
6.3 Perhaps the greatest practical need
is for power for trading between neighbouring local authorities,
and between county councils and their district councils, for work
and services within the functions of both parties. Existing powers
for trading between such partners (for professional, technical
and maintenance work, and IT) have been widely used for many years
with, so far as CIPFA is aware, no serious failures.
6.4 CIPFA believes it would be constructive
to allow such trading for all types of work and services within
the functions of both parties, without limitation by reference
to the CPAs of contractor local authorities. All local authorities
stand to benefit from inter authority trading (for example through
shared services) and it should not be made more difficult to trade
with another local authority than with the private sector.
6.5 CIPFA supports a robust, value-added
inspection regime for public services and also supports the joining
up of inspectorate activity to increase the efficiency and reduce
the burden of inspection. However, CIPFA is concerned that the
draft Bill's approach to CPA is based on a sophisticated system
of inspection leading to a very simplistic performance categorisation.
There is a danger that this "broadsheet analysis, tabloid
headline" approach will discredit the process and will not
produce the improvements that CPA is designed to achieve.
6.6 Local authorities are complex organisations
and potentially few will be able to demonstrate that they are
consistently "high performing" across all functions.
Inevitably the judgement will be "on balance" and therefore
it will be important that local authorities are clear as to how
they can move between performance categories and have the means
and incentives to do so. It will also be important for local authorities
to understand the relative weight of the judgements applied by
the Audit Commission, OFSTED, the Social Services Inspectorate
and other inspectorates or assessment bodies in arriving at the
overall conclusion on an authority's performance rating.
6.7 The draft Bill proposes that the Audit
Commission place local authorities into performance categories.
The commentary indicates that the Secretary of State will have
no power to vary the Audit Commission's decision on individual
authorities. The Secretary of State will then exercise powers
to determine the removal of regulatory controls or to grant additional
powers depending on the performance categories. The extent to
which this system provides incentives for local authorities to
improve depends on the attractiveness of the rewards on offer.
Arguably, while exemption from capping is welcome, the fact that
it has not been used since 1997 indicates that it is not a prize
that will promote significant improvement by itself.
6.8 Notwithstanding the previous comments,
CIPFA would encourage that the removal of regulatory controls
and the granting of new powers is not restricted only to those
authorities judged to be already in the "high performing"
or "excellent" category. Authorities that are "striving"
or "good" logically deserve opportunities to demonstrate
that they can act responsibly and with innovation. CIPFA would
also encourage a degree of controlled experimentation in giving
some freedoms and additional powers to a sample of less well performing
authorities to see whether this stimulates better performance.