Financial sustainability of local authorities Contents

2Ensuring financial sustainability in the future

Lack of clear long-term funding plan

18.In 2015–16, the Department offered local authorities a four-year funding settlement to allow them to plan their finances more effectively, so local authorities’ funding is currently fixed until the end of 2019–20. The Department told us that certainty allows councils to “make longer-term decisions in terms of its investment or how it will manage its services” and that “there is a case on value for money terms” for “longer-term certainty whenever we can give it”.35 Local authorities do not yet know what their overall funding settlement will be from the start of 2020–21. Some other important decisions about local authorities’ funding are also expected, including: increases in the proportion of local business rates that local authorities can keep; the Fair Funding Review, which will decide how local business rates are distributed from 2020–21; and proposals on how to deliver a long-term, sustainable solution to providing care for older people in need.36

19.The impact of these proposed changes on local authorities’ overall and individual funding are still unclear. Most of these changes will take effect in 2020–21, with decisions potentially being made close to the start of that financial year. The current level of uncertainty over local authorities’ future funding is causing concern within the sector. The Local Government Association (LGA) told us that councillors and officers across all councils share a nervousness about the cliff edge that they face in terms of the uncertainty around their financial situation.37 The Department told us that decisions about the overall level of government funding for councils after 2019–20 will be made by Ministers as part of the next Spending Review. Neither the Department nor the Treasury Officer of Accounts could be more specific about the timing of these decisions other than “during 2019”.38

20.Good financial planning relies on certainty and stability, while financial uncertainty creates risks to value for money.39 SOLACE told us that changes to local authorities’ funding without warning “undermines the long-term planning we need to be able to undertake in order to ensure the value-for-money of every public pound that is spent”. We received written evidence from Core Cities and Sheffield City Council , which expressed concern that the effect of the funding distribution formula being designed as part of the Fair Funding Review will not be known until almost the point at which budgets have to be set for 2020–21.40 Core Cities told us that “the future of Business Rates retention and planned business rates reset in 2020/21 is very concerning”.41 London Councils similarly told us that “having settled on 75% retention, the Government must urgently clarify a number of technical issues regarding the design of the scheme to provide as much certainty to the sector as possible.”42 The LGA told us that the proposals to change funding for adult social care in future adds even further uncertainty to local authorities’ finances.43

21.Putting in place transitional arrangements could limit the scale and impact of changes at short notice to local authorities’ funding. SOLACE told us that “it is absolutely vital that there is adequate planning undertaken with regard to any transitional arrangements that will be needed to avoid […] shocks to an already shocked system.”44 In their written evidence to us, Core Cities and Sheffield City Council told us that that “there is a maximum pace of change that can be handled” and transitional arrangements for previous major changes had recognised this. They pointed out the value of providing information in advance on transitional arrangements, such as any upper and lower limits to changes in funding for individual councils.45

The 2019 Spending Review

22.At the 2015 Spending Review, the Department led cross-government work to assess the funding needs of local authorities in the four-year period to March 2020 in order to provide advice to Ministers.46 However, in 2016–17, the first year of the spending review period, local authorities with social care responsibilities overspent their service budgets by £1.023 billion, and used £858 million of their reserves.47 Since the start of the Spending Review period, the Department has provided additional grant funding to local authorities to fill gaps in funding for adult social care and enabled councils to raise additional money from local taxpayers through council tax.48

23.The Department asserted that the recent short-term increases mean that the local authority sector is financially sustainable until the next Spending Review, at which point it will reassess the longer-term financial sustainability local authorities.49 It accepted, however, that local authorities’ use of reserves was not sustainable and that it could not base its proposals for the next spending review settlement on the assumption that local authorities could use their reserves to balance the books.50 The Department told us that it was clear that 2019 “is an important spending review for local government” and that it was committed to working with other government departments to make sure the Spending Review reflects the needs of local government.51

24.Evidence from local government sources was emphatic about the equal, or even greater, importance of addressing the overall level of funding compared to reassessing the distribution of funding.52 For example, SOLACE told us that “We have strong concerns about focusing on issues of distribution before the more fundamental question of sufficiency has been addressed” and Core Cities said “Whilst it is clear there are significant inequities in the current distribution across local authorities the overall inadequacy of funds is equally significant.” Several of these sources suggested that this could be done in other ways than simply providing money from central government, such as broadening the range of local income sources that councils can draw on. London Councils told us that if central government is not prepared to increase the quantum of centrally allocated resources available, then it needs to give local government greater control over its own resources and enhance its range and mixture of revenue raising capabilities.53

25.The Department told us that it was starting work towards next year’s Spending Review so that it could give Ministers in both the Treasury and in its Department, as well across the rest of Whitehall, a clear picture of the “pressures and opportunities for local government”.54 It agreed that it needed to improve its approach, including by improving engagement with other Departments, “because the tighter the finances get, the more important it is that our analysis is as comprehensive as possible”.55 The Department told us that it took expected increases in demand for services, demographic changes and rising homelessness into account as part of its bid for the previous Spending Review.56 We asked the Department for details of these projections. The Department was not willing to share this information with us.57 We sought these facts and figures to help us assess the credibility of the Department’s approach to analysis and its judgements about future sustainability, such as it will make at the next Spending Review.58

Impact of social care pressures on other local authority services

26.Over the last six years, local authorities have spent a greater proportion of their funding on providing adult and children’s social care services. These services are the responsibility of the Departments of Health and Social Care and for Education but are delivered by local authorities, primarily from local authority general funding. The share of local authorities’ spend on services that was devoted to adult and children’s social care has increased from 45.3% in 2010–11 to 54.4% in 2016–17. In 2015–16 and 2016–7 the Department enabled councils with social care responsibilities to increase council tax between 2016–17 and 2019–20 specifically to pay for adult social care. Since 2015–16 the money that councils raise from council tax has increased in real terms and it is projected to increase further in 2019–20.59

27.We asked the Department about whether the increase in social care’s share of spending was putting greater pressure on other services. The Department accepted that these figures show “increasingly councils are having to spend their money on demand-led services, where they can’t always control the costs that they will have to cope with”.60 The Department was clear that its aim was that councils were able to carry out “all the responsibilities that local government needs to carry out”, which went wider than social care services.61 From 2010–11 to 2016–17 there was a 3% real-terms reduction in social care spend and a 32.6% reduction in spend outside social care. Some individual service areas have seen very substantial reductions in spend. Spend on planning and development has fallen by 52.8%, housing services outside the Housing Revenue Account have fallen by 45.6%, and highways and transport spending has reduced by 37.1%. In many cases there is insufficient data to assess the impact of these funding reductions on service users.62

28.There is no single point within government that monitors the impact of spending reductions on services between spending reviews. The absence of this ongoing effective co-ordination means that the Department may not know if pressures in one service area quickly transfer to others or the extent of the risk that this poses to local authorities.63 The Department told us that it has worked intensely with the Departments of Health and Care and for Education but acknowledged that its engagement with other Departments has been less structured. It asserted that there is a regular meeting at which “every Department can come and find out what is going on and raise any concerns”.64 We asked the Department for an example of this process working in practice, and discussions taking place with other government departments about the performance of existing local services outwith social care. The Department could not immediately provide a relevant example and instead described the meetings that were being established for the next Spending Review or discussions around new burdens.65 The Department subsequently wrote to us on this point and described a range of meetings that seemed focused on individual councils that had already reached the point of intervention, the development of new policy, or the management of specific, existing funding streams or mechanisms. The letter did not contain a clear description of work on ongoing pressures and the impact of funding reductions.66

Statutory override for new international accounting standards

29.Local authorities will be affected by the introduction of new international accounting requirements within International Financial Reporting Standard 9 (IFRS 9). IFRS 9 will potentially impact many investments, most clearly those carried out through collective investment vehicles (where investors pool funds to invest together). Local authorities’ financial accounts will now need to reflect changes in the market value of assets such as property funds or money market funds. These unrealised gains and losses (transactions that have occurred on paper, but have not actually taken place) will be treated as actual revenue income and spending affecting the council’s budgetary balance, even though the investment is still held by the council and may eventually be sold at a different value. This means that if the value of an affected investment falls by £10 million then the council’s reserves will be £10 million lower. This money will not be available to spend on services, and if reserves fall too low then the council will need to replenish them, for example by raising council tax or making further service cuts. Previously changes in the market value of assets and investments owned by a local authority would have been charged to an accounting reserve until the investment was sold and the gain or loss confirmed.67

30.CIPFA is required by UK law to adopt IFRS 9 within the code it sets for local authority accounting. However, it told us that it is concerned about the impact of IFRS 9 on local authority finances. Under the new arrangements, CIPFA told us that “ups and downs” in the market value of a local authority’s assets would have a “a real revenue hit” on local authorities. Taxpayers would subsequently be affected as IFRS 9 could affect how much money the local authority holds in its reserves and potentially how much the local authority needs to raise through council tax. CIPFA has asked the Department, on behalf of the local authority sector, to provide a statutory override for this change.68 The Department confirmed to us that a statutory override is possible and that this is currently under consideration.69

35 Qq 10, 126–128; C&AG’s report, figure 3

36 C&AG’s Report para 4.22–4.23

37 Q 10

38 Qq 127, 200–202

39 SOLACE (FAL0007); London Councils (FAL0011); C&AG’s Report para 4.24

40 Core Cities (FAL0003); Sheffield City Council (FAL0002)

41 Core Cities (FAL0003)

42 London Councils (FAL0011)

43 Local Government Association (FAL0006)

44 SOLACE (FAL0007)

45 Core Cities (FAL0003); Sheffield City Council (FAL0002)

46 C&AG’s Report, paras 4.4–4.6

47 C&AG’s Report, figures 17, 21

48 Qq 70–71, 129–131; C&AG’s report, figure 3

49 Q71

50 Q 62

51 Q 179

52 SOLACE (FAL0007); CIPFA (FAL0008); London Councils (FAL0011); Core Cities (FAL0003); Sheffield City Council (FAL0002)

53 London Councils (FAL0011); Core Cities (FAL0003); Sheffield City Council (FAL0002)

54 Q 59

55 Qq 112; 179–185

56 Q 137

57 Qq 133–149, 159–160

58 Qq 133–142

59 C&AG’s Report, paras 1.12, 2.9; figures 1, 3

60 Qq 77, 81

61 Q 78

62 C&AG’s Report, paras 2.8, 2.32; figures 15, 17

63 C&AG’s Report, para 4.50

64 Qq 167, 179

65 Qq 165–179, 187–193

66 MHCLG (FAL00013)

67 Q 13; CIPFA, IFRS 9 and collective investment vehicles, February 2018

68 Qq 13–14; CIPFA, IFRS 9 and collective investment vehicles, February 2018

69 Qq 197–199

Published: 4 July 2018