For more than a decade I have been analysing local authority accounts, tracking patterns and building models showing the financial health of the sector. Reserves are always the hot topic and is no surprise that last year most councils needed to tap into these funds – some at an unsustainable rate.
What is more, with an alarming 70% of English councils not publishing accounts by the 31 May deadline – including those councils widely known to be in financial trouble – it is reasonable to assume there are some significant problems waiting to come to light.
At my last check before writing (13 June) 116 of the 314 local authorities in England had published their accounts. From the remainder, I was able to find 112 delayed publication notices, which provide some explanation.
Predominantly, these cite issues associated with the 2021-22 audit, particularly assets and pensions valuations. It is interesting to note that authorities in Scotland and Wales all managed to publish accounts on time.
The audit process in England is not currently working. This is due to a combination of issues that have come about since the Audit Commission was abolished in 2015.
For instance, assets and pensions valuations are not really the critical issues in determining if a council is going to sink or swim in the next year. These matters should not be allowed to hold everything else up if this is the case.
What is clear is there is a structural problem beyond the control of individual councils. I am hopeful, however, that Government understands the situation and is intent on addressing it.
Accounts that have been published show signs of financial stress, despite reflecting a healthier cohort. Overall, an 11% drop in usable reserves is reported in the year 2022-23.
There are caveats, such as Covid business rate reliefs that sit in reserves but are not really usable. Adjusting for these, the decline would be a more comfortable 4%, although increases to reserves in recent years would also be diminished.
Many councils had planned to use reserves to balance budgets as they adjusted to increased needs and reduced funding. However, extraordinary economic conditions have resulted in unplanned reserves usage that looks set to continue as many authorities face staggering savings targets.
The distribution of reserve use is far from even across councils. Metropolitan boroughs, outer London and unitary councils used disproportionately large amounts of reserves.
This is further evidence that the lack of a fair funding formula is storing up big problems in certain parts of the country.
There are worrying trends, too, when looking at distribution among individual councils. Notably, those with the least reserves used them at a higher rate. If economic conditions, funding or service demands do not improve, or if there is no additional Government support, some councils will inevitably falter within the year. A growing number will then follow each year thereafter. Understanding these challenges so that crises can be averted is precisely why publishing accounts is so important.
I work with many councils to help them benchmark their own position and account for wider trends in their own decision-making.
In doing so, capital health as an equally important indicator of overall financial reliance is considered. After all, the problems seen in Thurrock and Woking are capital in nature – high levels of borrowing leading to sustainability issues. In the last year, overall borrowing by councils increased only slightly and debt gearing actually reduced.
Reduced borrowing is not necessarily a good thing. It means less capital investment is available for councils to do brilliant things, such as building affordable homes and regenerating towns. But it is a trend likely to continue because a lot of council borrowing is ‘internal’. Councils effectively borrow their own reserves. The squeeze on reserves risks pushing that debt to external lenders – where high interest rates will bite, and councils are right to be wary.
Inflation in the construction industry and rising interest rates means big schemes have become more expensive. This calls for effective business cases, due diligence and monitoring, but also funding assistance from Government and discounted borrowing for well-managed schemes delivering significant quality of life improvements.
I believe we need to pay more attention to what the councils’ accounts can tell us about their financial health.
The Chartered Institute of Public Finance and Accountancy’s Financial Management code rightly suggests balance sheet health should be considered by leadership teams –not just the section 151 officer – and that a better understanding of the relationship between the current and capital items on balance sheets should be developed.
This will, of course, become easier when Government, authorities and auditors work together to clear the audit backlog in England.
Dan Bates runs a local government financial resilience benchmarking service at LGImprove (www.lgimprove.com)