CIPFA index finds up to 15% of councils ‘at risk of financial instability’

21 Dec 18

CIPFA has identified up to 15% of councils in England are at risk of financial instability, through refining its resilience index.

CIPFA reworked the indicators used to define financial stability after consulting with the sector.

The indicators include: ‘reserves depletion time’, ‘level of reserves’, ‘change of reserves’, ‘council budget flexibility’ and ‘council tax to net revenue expenditure’.

After applying these indicators, CIPFA found that the majority of councils in England were financially stable but 10% to 15% were not.

In a briefing note, published today, the institute showed that in the ‘reserves depletion time’ county councils performed the worst.

This measure shows the number of years it will take a council to deplete their reserves if they continue to use their reserves at the same rate as they have in the last three years.

Counties also performed the worst with regard to ‘level of reserves’.

The briefing note said: “County councils have a lower level of reserves than other types of council. District councils, which do not have a social care responsibility, typically have much higher levels with the majority holding reserves that exceed their net annual expenditure.”

CIPFA’s briefing note said that there can be “good reasons” for depleting reserves but “continued depletion of reserves may be a sign of financial stress and being unable to deliver a balanced budget”.

Rob Whiteman, chief executive of CIPFA, said: “With acute financial pressures continuing to put many councils under significant strain, the resilience index provides a useful tool for recognising potential signs of risk to councils financial stability, and prompting appropriate action.

“In time, the financial resilience index will link with CIPFA’s new financial management code, and support the s151 officers in their annual report to the council setting out the proposed budget for the year and medium-term financial strategy.”

He added: “CIPFA believes that the ability to provide timely, transparent, and clearly understood advice can be effective in stabilising councils before they go over the cliff edge.”

John Sinnott, chief executive of Leicestershire County Council, said: “CIPFA has demonstrated that whilst many authorities are managing their difficult financial situation, some will need help sooner rather than later.

“Having this resilience index information benefits the whole sector so that we discuss what’s needed to ensure another failure like Northamptonshire is avoided. The sector can only benefit from being honest with itself, which hasn’t always been the case.”

The County Councils Network has estimated that the annual costs of providing services to the most vulnerable disabled adults will be almost £2bn higher in 2025 than a decade ago, with 49% of these costs falling in counties.

In summer, local authority chief executives suggested the index would not provide a “meaningful assessment”.

Northamptonshire County Council issued the first section 114 notice - meaning the council could not balance its budget - for 20 years at the start of the year. Later in the year it was forced to issue a second 114 notice

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