Sunday, February 13, 2011

Council Finance trouble

Big article in The Sunday Times today on local government finance, which I can't link to because of their paywall. It deals primarily with the reduction in government support for Councils and their reaction to it. It also analyses the explosion of highly paid posts in local government that occurred under the last government.

What is going on is that the government is, quite rightly, reducing spending and local government is having to share in this. Good Councils that control costs and run balanced budgets can take this, not easily perhaps, but it is not a disaster. Basildon Borough Council is in this category. Bad Councils that have stumbled along for years with a high cost base and poor financial controls are in trouble. So, we see the appalling example of Manchester City Council, who are almost gleefully cutting services while blaming the government, and others who are nearly as bad.

My expectation is that this year will be sound and fury, but next year will be the crunch when the second round of reductions in government funding hit. At that point it is actually possible that some of the worst Councils will implode. A lot of people don't seem to get this, local authority finance is a complex, dry subject after all. So, instead there is a lot of chat about excessive salaries and Council newspapers, because they are easy to understand.

The reality is much, much worse.


Anonymous said...

I note that, unlike your post on ConHome, your blog makes no mention of council's using capital reserves. Presumably you have now had the chance to look at section 23 of The Local Authorities (Capital Finance & Accounting) (England) Regulations 2003? You really should check your facts before accusing others of being ignorant of local authority finances.

Steve Horgan said...

Well, let us see shall we?

- The quoted regulation does not apply to Capital, rather Capital Receipts, which are a subset of Capital. So, if a Council disposes of a fixed asset the monies are a Capital Receipt, but if a Council simply accumulates reserves from a revenue surplus that is also Capital, but not a receipt and not subject to Section 23 at all.

- Section 25 of the same regulations deals with things that can be considered to be Capital og any kind. However, the list is not exhaustive by any means. For example redundancy and single status costs can be capitalised. Also, so-called 'Invest to Save' projects, where Capital monies are invested in order to generate a revenue return can also be capitalised. This last can cover a multiplicity of purposes and note that the long-term financial impact is all revenue. All you need is a business case.

- This whole discussion is not about good practice, it is about bad practice. Decisions are made by people and they sometimes get things very badly wrong indeed. There are hundreds of Councils in the Country and quite a few have bimbled along in a relatively benign financial climate without paying the correct attention to cost management, balancing revenue accounts or maintaining both decent reserves and a decent Capital investment programme. Some of these Councils are in deep trouble regardless of the various checks and balances that are in place and just assuming that everyone has done a great job in the spirit of the regulations for the last 10 years is hopelessly naive.

- The quickest way to massage capital into revenue would be to construct some spurious Invest To Save project. Bear in mind the Council writes the business case, and so they have complete control of the theoretical rate of return for example. Such a thing is, of course, a betrayal of the public trust, but that does not mean it doesn't or won't happen.

- One last question, why is that Local Authority Social Services departments can totally screw up, while finance departments cannot? It is actually against quite a lot of legislation and regulation for children to be murdered or abused while being monitored by Local Authority, but it happens. Just because something says something on a piece of paper does not mean that it automatically happens in the real world.

Anonymous said...

You need to reconsider your terminology. The term "capital" in local government finance has a very specific meaning due to the various regulations that limit the way in which capital money can be used. The reserves that you are referring to are revenue reserves in local government parlance.

Anonymous said...

By the way, redundancy and single status costs do not meet the definition of "capital" expenditure but may, by concession, be financed from capital receipts under a special direction issued by the secretary of state.

Steve Horgan said...

My first big job in politics was as Cabinet Member for Resources when we took over a Council in financial crisis after years of Labour control, when I had to lead the construction of a workable budget that kept the show on the road. I have since been part of a Cabinet team that has made 8 further budgets. My point is that I have a great deal of practical experience on this stuff, which I am afraid Mr. Anonymous you demonstrably do not.

You are simply wrong about your definition of Capital. The process for funding Single Status and Redundancy from Capital is called 'Capitalisation'. The clue is in the name.

Bear in mind how this exchange started, with your view that revenue and capital were so well defined in terms of Local Authority finance that transfers between same were effectively impossible. I reiterate the point that this is not the case even within a fairly rigid interpretation of the rules, and is certainly not the case if you take a more 'flexible' approach.

How about posting under your own name by the way? Courage of your convictions and all that.

Anonymous said...

We will have to agree to differ. You can lead a horse to water .... and all that.

I really dont see the need to personalise any of this, but for the record I have 28 years experience of Local Government finance and am a professionally qualified accountant.