An analysis of local government since the cuts programme began shows that overall financial performance is strong, but liquidity and absence management still need improvement
As demands on local government continue to increase and further funding reductions are due, Grant Thornton has conducted a review of the financial health of 24 English local authorities. This gives an up-to-date picture of how the sector is coping and helps to assess the further financial challenges to come.
The review applies a 'traffic light' system of risk rating to the themes, which in addition to indicators of financial performance included strategic financial planning; financial governance and financial controls. You can download the report here.
In 'Surviving the storm: how resilient are local authorities?' we examine the key indicators of financial performance based on factors including liquidity, borrowing, workforce, performance against budget, reserve balances and schools balances.
For financial performance, 86% of authorities were rated green, demonstrating that councils have generally acted prudently over a long period and are accordingly better placed to weather the effects of last year’s Spending Review . However, reserves are starting to be used and from 2012/13 onwards could be further depleted. It is vital that reserve levels, both general and earmarked, are carefully monitored to ensure the financial health of councils during the Spending Review period is maintained.
While local government accountants have a sound understanding of the use of ratios to interpret financial statements, this skill has traditionally only been applied to procurement exercises and the accounts of commercial suppliers. Similarly, chief financial officers will have kept a careful eye on indicators such as those relating to council tax collection rates, cash flow, borrowing and reserves and balances, yet there has never been a formal requirement for council accounts to be subject to detailed financial ratio analysis.
Our review represents one of the first times that financial ratios have been applied to council financial statements for inter-authority benchmarking.
Of the sample, 35% scored amber for liquidity, which looks at the working capital ratio, indicating if an authority has enough current assets to cover its short-term liabilities. Councils will need to ensure liquidity is carefully monitored, for example in the collections of council taxes during challenging economic times, and also the collection of business rates, should this income be retained by authorities as is currently being proposed.
Absence management is also a critical issue for authorities as pressure continues to deliver more for less. More than half (57%) of the sample received amber ratings – the highest level of risk within the financial performance theme. Authorities will need to ensure they effectively manage unplanned absence levels, to improve productivity and maintain service continuity.
When assessing the strength of financial performance local authorities may find the following checklist a useful guide:
- Budgets are robust and prepared in a timely fashion and the council has a good track record of operating within its budget
- Budgets, performance, and unplanned absences are monitored at an officer, member and cabinet level and officers are held accountable for budgetary performance
- Financial forecasting is well-developed and forecasts are subject to regular review, including trend analysis, benchmarking of unit costs, risk and sensitivity analysis
- Budget profiles are accurate and regularly monitored
- There is an effective internal audit which has the proper profile within the organisation
- There is an assurance framework in place which is used effectively by the council and is how business risks are managed and controlled
- The Annual Governance Statement gives a true reflection of the organisation
Overall, and perhaps surprisingly given the sector's initial reaction to the Spending Review and the scale of funding reductions required, local authorities have coped well so far. However, the challenges facing the sector remain significant and very real. There has been effective leadership from senior management and elected members who have not shied away from making some very difficult decisions.
The task now is to continue to implement decisions affecting 2011/12, the impact of which will not be easy for service users, staff and other stakeholders. In addition, over the medium-term, councils still need to identify and deliver savings over the next three years, which remains a significant challenge.
Paul Dossett is local government partner at Grant Thornton
