Managing risk as cash reserves fall

2 Oct 17

Cash reserves have long been central to councils’ ability to respond to major incidents. As the cost of these rises, prevention needs to be a priority

Falling local government cash reserves have been in the spotlight in recent months. The ongoing plight of Kirklees Council and Lancashire County Council are troubling but will come as little surprise to those familiar with council finances.

Net borrowing across the sector has been on the rise since 2013-14 and, as a whole, local government has not run a surplus since 1996.

As funding continues to be squeezed, recent cuts mean that, by 2020, local government in England will have lost 75p out of every £1 of the core central government funding it received in 2015.

These ongoing funding difficulties are affecting all areas of local authorities’ activity, and this is thrown into sharp relief when councils make plans to respond to major incidents. Unsurprisingly, the ability to draw on cash reserves is often a vital factor in this sort of response.

More council claims

Our concerns are growing as Zurich Municipal is now seeing an increase in the number of large multi-million pound claims from the local government sector, specifically rising volumes relating to highways, safeguarding and property.

Many local authorities fund claims like these themselves so avoidable incidents of this nature can put further pressure on reserves. They also create an upward pressure on premiums.

The change in the discount rate for personal injury claims is another element that local authorities must factor into their overall calculations and, while this will be reviewed, it remains a factor in increasing costs.

As well as “traditional” challenges, there is also the continuing threat of cyberattacks. Zurich Municipal research found that local authority leaders appear broadly confident in their cyber security, despite recurring instances of damaging data losses across the sector, which appear to suggest more of a widespread vulnerability that will only be compounded by the ongoing depletion of cash reserves.

The research also showed that this lack of urgency at the top is further compounded by the range of challenges local authorities are now facing from governance changes to demoralised staff, redundancies and reduced investment.

Prevention priority

While councils have proved highly resilient over the past few years, cash reserves have always been a vital component of their ability to respond to unforeseen circumstances. As pressure on these backup funds grows, it is clear that greater priority needs to be given to incident prevention through robust risk management procedures.

With this in mind, it is essential that local authorities set aside time to regularly review their long-term financial outlook and preparedness.

A longer-term look

Government cuts have inevitably concentrated local authorities’ focus on short-term goals, and how to maintain services with less money around. Ultimately, organisations need to consider their approach to ensuring long-term sustainability and resilience, alongside effectively managing an environment where increasing financial risk – exacerbated by factors like dwindling reserves – is a reality.

While some of these long-term forces are beyond the control of local authority leaders, it is vital that conversations about mitigating the risk landscape of the future, and recognising the specific challenges falling cash reserves pose, are started within local government now.

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