A decade after the 2008 financial crisis, public sector austerity is likely to continue until at least the middle of the next decade and, with Brexit, quite possibly beyond.
Effective financial management in the public sector has always been built on planning for the long term, but the necessity now is to ensure that organisations have the resilience to deliver annual savings and manage significant financial shocks, while still pursuing ambitious goals for their communities.
These pressures bring into sharp relief the requirement for councils to balance their budgets. While this is demanding, it is also central to local government autonomy – it means the tough decisions are made locally.
These tips are intended to help chief financial officers and their authorities build financial resilience into all aspects of their planning and operations.
They will help identify the warning signs of financial stress and explain the pillars on which financial resilience is built.
These 10 tips are based on CIPFA’s work with local authorities to review their financial resilience.
We have maintained confidentiality and anonymity, and are grateful for the candour and insights from council CFOs who commissioned these reviews; they have been invaluable in helping us provide these recommendations.
Financial stress has several symptoms:
• Running down reserves or a rapid decline in reserves; by definition, using up reserves to avoid cuts can only provide temporary relief.
• A failure to plan and deliver savings to ensure the council lives within its resources.
• Shortening medium-term financial planning horizons – perhaps from three or four years to two or even one. A failure to plan could indicate a lack of strategic thinking and an unwillingness to confront tough decisions.
• Greater “still to be found” gaps in saving plans – in the early days of austerity, councils might have agreed a four-year financial strategy with reasonably robust plans for the first three years. Now, they are specifying how savings will be made only in the next financial year and, even then, these might be targets rather than firm plans.
• A growing tendency for unplanned overspends and/or carrying forward undelivered savings into the following year. As well as creating a need for greater cuts in the future, unplanned overspends are a sign an authority is struggling to translate its policy decisions into actions.
Although these 10 tips are focused on local government, many will resonate across the public sector.
1. Build a culture of constructive challenge
The section 151 officer is legally responsible for signing off a deliverable budget; setting targets doesn’t meet that test. A culture of constructive challenge in each part of the organisation is essential. Departmental managers and the political leadership need to question constantly not just what is being proposed but also how it will be delivered.
2. Make medium-term savings plans
Savings should be planned over at least three years to allow any policy changes to be agreed and delivered. This is far more likely to result in financial objectives being met than trying to plan and implement savings in a single year.
3. Decide on a longer-term plan, not a target
While longer-term savings plans will inevitably include more detail in the first two or three years, councils need a good understanding of where they will find the savings in later years. Simply quoting a future savings target that is not based on the realities of the authority’s operations is storing up serious risk.
4. Don’t deny the details
Well-managed councils will produce high-quality plans and these need enough detail to be credible. There is a tendency to provide plenty of information on small savings while discussing the big ones in broad terms that lack precision about what needs to be done. Relentless focus on the detail is essential to turning policy goals into savings.
5. Watch for warning signs
Authorities need to look out for warning signs that savings plans may not be deliverable, such as a department with a history of in-year overspends. If a unit has missed its savings target one year, it is highly unlikely to deliver a more ambitious savings plan the following year without significant changes to its management, operations and culture.
6. Be realistic rather than optimistic
A repeated failure to deliver financial plans may be a sign that optimism bias is creeping into the calculations. This could include making unrealistic assumptions about the size and speed of savings. This builds up problems for the future. A culture of constructive challenge excludes optimism bias in favour of realism bias, built on rigorous examination of goals, underlying assumptions and implementation plans.
7. Get financial team feedback
For chief finance officers, the quality of financial challenge in departmental forecasts regarding pressures and savings is crucial. The finance team needs to constructively challenge departments on their behalf – a key warning sign that plans could fail is a lack of feedback to the CFO on such challenges.
8. Have the right skills
Being more commercial needs to happen in step with robust due diligence, knowing about the pitfalls and risks, having effective governance, managing it tightly and acting proportionately. This means having the right skills in place.
9. Make realistic assumptions
When considering a commercial scheme, it is crucial to have balanced assumptions about the likelihood of success, how much income will be generated and how quickly it will flow.
10. Don’t bank on business rates
Councils are well aware that they are likely to receive additional income from business rates retention. However, they need to be prudent rather than optimistic in the anticipation of receiving extra revenue from this source over the medium term.
Top tips...
Do
- Make detailed plans – don’t just set targets
- Question constantly both what is planned and how it will be delivered
- Watch out for warning signs, such as regular overspending
Don’t
- Let yourself get optimistic
- Ignore the detail
- Make unrealistic assumptions about commercial schemes or business rates
Further reading
Insight reports: www.cipfa.org/cipfa-thinks/insight
● Building Financial Resilience by Richard Vize
● Balancing Local Authority Budgets by Sean Nolan and Joanne Pitt
CIPFA can undertake an expert, independent, impartial and confidential financial resilience review of your organisation, please call us on 020 7543 5600 for more details.
PF recently investigated how councils were increasingly using their reserves: see here.
