Welcome to the Solace Financial Sustainability Masterclass

1. Welcome to the SolaceFinancial Sustainability Masterclass 28th June 2019

2. A Welcome from our Chair Susan Parsonage, Chief Executive, Wokingham Council

3. Session One Sarah Ironmonger, Director, Public Services, Grant Thornton

4. Session Two Neil Amin Smith, Research Economist, IFS

5. English local government funding: a period of change and challenges Solace Financial Sustainability Masterclass 28/06/2019 Neil Amin-Smith Research Economist, IFS

6. Local government finance in 2019... • ...is in the middle of a period of profound change, • and there are big challenges ahead. SOLACE– Financial sustainability masterclass

7. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding Big decisions to be taken SOLACE– Financial sustainability masterclass

8. A period of change SOLACE– Financial sustainability masterclass

9. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding Big decisions to be taken SOLACE– Financial sustainability masterclass

10. Firstly, the amount of money available has fallen substantially Spending cut by 21% in real terms between 2009-10 and 2017-18 SOLACE– Financial sustainability masterclass

11. And cuts have fallen disproportionately on deprived areas SOLACE– Financial sustainability masterclass

12. Councils have (relatively-speaking) protected statutory and acute services... ...at the expense of significant cuts to more discretionary services SOLACE– Financial sustainability masterclass

13. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding Big decisions to be taken SOLACE– Financial sustainability masterclass

14. The second big change relates to how this funding is distributed between councils • Key to any funding system will be how it trades-off redistributing resources to councils and providing incentives to councils Councils have different needs – might require different levels of funding to achieve same outcomes/levels of service Councils have differing capacity to raise revenues themselves But, also want to incentivise councils to grow their revenues and tackle their spending needs • → Tends to be a trade off between the two SOLACE– Financial sustainability masterclass

15. Balance between incentives and redistribution has been shifting • A number of changes have shifted the system towards providing greater incentives to councils • → At the expense of reducing the extent of equalisation/redistribution of funding between councils New Homes Bonus Localisation of council tax benefit Business rates retention SOLACE– Financial sustainability masterclass

16. Business rates retention has been the biggest move in this direction • Local government as a whole retains 50% of business rates revenues • → These are redistributed between councils, with redistribution set at the beginning of a cycle If a council’s revenues grow in real terms during that cycle, it gets to keep 50% of the extra revenue But if a council’s revenues fall in real terms, it has to bear the cost (within limits) • Councils thus have an incentive to grow their revenues, but there is also a risk of divergence between councils in their relative funding levels • This direction of travel is set to continue – plan is to move from 50% to 75% business rates retention from April 2020 SOLACE– Financial sustainability masterclass

17. In addition, the Fair Funding Review could mean further substantial changes • Updating how needs are assessed, including reducing the account taken of deprivation • An overhaul of how different areas’ ability to raise council tax is taken into account 2013-14 allocations were based on a system that took into account council tax bases rather than council tax revenues No account was taken of variation in revenue-raising capacity in cuts to grant funding in 2014-15 and 2015-16 From 2016-17 cuts have taken into account council tax revenues Likely to move to a system that instead takes account of differences in council tax bases → This could have quite large effects SOLACE– Financial sustainability masterclass

18. Challenges ahead SOLACE– Financial sustainability masterclass

19. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding Big decisions to be taken SOLACE– Financial sustainability masterclass

20. Current funding plans unsustainable? Revenues from council tax and (75% of) business rates unlikely to keep pace with demand for and cost of local services SOLACE– Financial sustainability masterclass

21. There is no easy solution to this • Either other services will have to be cut (some have already experienced drastic cuts) • Or it will not be possible to maintain social care provision at current levels, let alone increase generosity of system There are already signs that social care funding is being stretched (e.g. rising levels of vacancies in the sector) • Alternatively, councils could be given other sources of funding Maintain (re-introduce) and increase central government grant funding Access to additional sources of revenue... SOLACE– Financial sustainability masterclass

22. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding • Devolution of additional sources? Big decisions to be taken SOLACE– Financial sustainability masterclass

23. Tax devolution to English councils Devolution of further tax revenues could be one way to address this – and provide stronger incentives and more discretion to councils Many in sector keen on additional tax devolution Many countries employ a wider range of sub-national taxes than we do SOLACE– Financial sustainability masterclass

24. Possible income from tax devolution SOLACE– Financial sustainability masterclass

25. Possible income from tax devolution SOLACE– Financial sustainability masterclass

26. Possible income from tax devolution SOLACE– Financial sustainability masterclass

27. Income tax bases are often unequal SOLACE– Financial sustainability masterclass

28. Nevertheless, income tax would be the best option If government wanted to devolve significant new revenues and powers to councils, a local income tax looks like the best option Identifying where taxpayers live and levying taxes appropriately much easier than identifying location of profits or value-added Income taxpayers are local voters – shoppers and business owners often aren’t Broader incentives to boost local incomes and employment – including via helping residents to access better jobs in neighbouring areas Tourist accommodation taxes would raise little money in many areas Economic case is far from clear cut Full VAT applied to tourist accommodation, unlike many EU countries Tax devolution not a panacea though – still boils down to an increase in national tax burden, or accepting lower levels of public services SOLACE– Financial sustainability masterclass

29. Outline Cuts over the past decade The changing aims of the funding system Sufficiency of current sources of funding Big decisions to be taken SOLACE– Financial sustainability masterclass

30. Balancing incentives versus redistribution... Decisions about future revenue streams need to consider balance between incentives and redistribution There has been a rebalancing towards incentives, but little discussion of where we want this to settle Such trade-offs also at heart of FFR and review of BRRS – not just technical exercises... Stronger incentives provided by 75% BRRS But also greater divergences between funding between areas How to trade off is inherently political and needs wider debate • Answer will also depend on... ...how much control do councils have over their BR revenues? ...how far do we think councils will respond to incentives/what are we incentivising? SOLACE– Financial sustainability masterclass

31. ...and consistency versus discretion? Greater reliance on locally-raised revenues (+ equalisation of tax bases rather than revenues) gives councils more discretion to choose balance between taxation and spending Even if significant redistribution, freedom to set tax levels will translate into differences level of services provided by different areas Compatible with service expectations? e.g. new national standards for assessing eligibility for care and additional requirements for the services councils have to provide SOLACE– Financial sustainability masterclass

32. Summary Local government funding is in a period of substantial change • 21% real-terms cuts to funding 2009-10 to 2017-18 • Significant rebalancing towards a system that provides greater incentives at the expense of reduced equalisation Challenges ahead require big decisions to be taken • Current funding plans imply significant cuts to services • Either means accepting much lower levels of service provision, or increasing the national tax burden • A more public debate is needed to decide what we think local government should mean: • How willing are we to tolerate different areas having quite different levels of services? • How important is providing incentives to councils? Is it effective? • Should different areas be able to choose their own tax/spend profiles? SOLACE– Financial sustainability masterclass

33. Refreshment Break

34. Session Three Brian Roberts, Director for Local Government, CIPFA

35. The Northamptonshire StoryThe Council that Failed Financial Sustainability Masterclass JUNE 2019

36. Northamptonshire: Path to Intervention • Early warning signals • Best Value Inspection • Government response

37. Northamptonshire: Path to Intervention Early warning signals: • Concerns about NCC’s financial position emerged as early as 2013. • Adverse VFM opinions in relation to 2015/16 and 2016/17 accounts. • Their own budgetary documents. • The LGA Peer Review of NCC’s financial planning and management in September 2017.

38. Northamptonshire : Path to Intervention Early Warning Signals Ignored resulting in: • Budgets not balanced • Grant claims disallowed • Lack of challenge (political & officer) • Savings targets set too high • Unrealistic strategic direction from the very top • Growing financial and service pressures • Audit points in ISA 260 not addressed

39. Northamptonshire: Path to InterventionBest Value Inspection • 9th January 2018 the SoS announced a best value inspection of NCC • Inspection review completed and reported on 15th March 2018. Key findings: • NCC had been failing in their BV duty for sometime (since 2013/14) • This was not due to lack of funding, but poor governance. • Recommended restructure in the long term and Commissioners in the meantime.

40. Northamptonshire: Path to InterventionResponse • 27th March 2018 the SoS announced that he was “minded to” appoint Commissioners to NCC. • At the same time he issued an invitation to LA’s to put forward proposals for restructuring (deadline end of July – was extended to end of August). • SoS announced on 10th May, the appointment of Commissioners.

41. The Role of Commissioners Functions to be exercised by the Commissioners: • All functions associated with the governance and scrutiny of strategic decision making. • All functions associated with strategic financial management, including the power to amend budgets as necessary. • Non-executive functions relating to the appointment and dismissal of head of paid service, the monitoring officer and the chief financial officer.

42. Stabilising Finances & Sustaining Service Delivery ABOUT • Stabilising the County Council’s financial position • Back to basics on managing the money and monitoring • Delivering savings • Driving better value for money for the Council taxpayer • Making all council services sustainable NOT ABOUT • ‘Slash & Burn’ approach • Making staff redundant • Dwelling on the past

43. The Financial Challenge The Commissioners inherited: • A deficit of £35m for 2017/18 • An in-year overspend projection of £30m for 2018/19 (and a budgeted savings target of £35m) • A projected shortfall for 2019/20 of £60m The County Council faced an unprecedented financial deficit of £125m over 3 years

44. Stabilising the Finances The Council appointed a new Cabinet Financial and governance measures taken by the Commissioners include: • An independent overview of the financial position from CIPFA • Issuance of a second s114 notice – met with a clear response from the Council • Repatriation of the outsourced finance business partner function • Resignation of the s151 officer

45. Stabilising the Finances …Urgent measures taken by the Commissioners include: • Appointment of support to the finance commissioner • Appointment of a new Chief Executive • Development and approval of a stabilisation plan – more savings being delivered • Application for £70m capital dispensation • Appointment of a new s151 officer and a Director of Transformation (new post) • Commissioners holding ‘surgeries’; to be accessible to local people

46. Latest Position on Stabilising the Finances • Financial position in 2018/19 has improved dramatically as revenue savings have been vigorously pursued • 2018/19 likely to break even or better • 2017/18 deficit met from capital receipts • A robust, balanced budget for 2019/20 approved in February

47. Stronger Financial Management & Strategic Leadership (1) Alongside stabilising the finances there was a need for a stronger financial management (work in progress) Measures taken or to be taken include: • Careful review of ISA 260s from 2011 to 2016/17 • Comprehensive response to draft ISA 260 for 2017/18 • Back to Basics with budget monitoring • Back to Basics – a review of financial systems and processes ….when did you, personally, last review your suspense accounts and control accounts?

48. Stronger Financial Management & Strategic Leadership (2) • Back to Basics with thorough preparations for 2019/20 budget • Further repatriation of finance function • Invest in training for finance team (CIPFA Programme) • Finance training for scrutiny members and budget managers “In Local Government there is no substitute for doing the boring well” Max Caller. March 2018

49. Northamptonshire – A One-off? • Wider financial sustainability. • Other LA’s showing signs of financial stress. • FM Code, Resilience Index, Resilience Reviews.

50. Panel Discussion Susan Parsonage, Chief Executive, Wokingham Council Sarah Ironmonger, Associate Director - Public Services, Grant Thornton Neil Amin Smith, Research Economist, IFS Brian Roberts, Director for Local Government, CIPFA