How local government finances can be re-engineered to deliver value for money

1. How local government finances can be re-engineered to deliver value for money Alex Burfitt June 2019

2. Content • Challenges faced by the sector • Three shifts in local authority finances • The interface between revenue and capital • Governance and audit issues

3. Pressures on the sector • 28.6% real terms reduction in spending power from 2010-11 to 2017-18 • Levelled off since 2016-17 for upper tier authorities but not for districts • Growing demand for key services: • Adult social care • Children’s social care • Homelessness

4. Shifting between financial responses • 2010-11 to 2013-14 • Huge reductions in service spend: -£7.2bn • Growth in non-service spend: +£800m • No change in investment and trading income: +£100m • 2013-14 to 2016-17 • Slow down in service spending reductions: -£2.6bn • Big cuts in non-service spending: -£900m • Growth in investment and trading income: +500m

5. Shifting the balance of service spend • Social care spend has stayed relatively flat at around £25bn throughout this period • Non-social care spend fell from £21bn to £14bn • Social care as a share of service spend has grown from 55% to 65% from 2010-11 to 2017-18

6. Shifting costs onto the user • LAs are offsetting reductions in their own (net) spending on non-social services by shifting costs onto the user • Sales, fees and charges: • Increased by 11% from 2010-11 to 2017-18 • Now account for 29% of total spend – up from 20% • Net spending on these services fell by around 30% • Total spending fell by around 20%

7. The capital side: Reducing capital costs to revenue • Borrowing costs must be met from the revenue side • Interest payable • MRP – a provision to pay back the capital on maturity loans when it falls due • LAs can also make discretionary revenue payments to support capital expenditure

8. The capital side: Invest to save? • Significant growth in capital spending (non-education): • Transformation programmes • Capitalisation of revenue costs • Commercial investment • LAs are now much more capital intensive: • 2010-11 - £12bn on capital and £46bn on revenue • 2017-18 - £18bn on capital and £39bn on revenue

9. The capital side: Commercial investments • Some LAs have made investments in commercial property in order to generate a revenue return. • Hard to pick out in the data – but there has been a significant increase in the acquisition of land and existing buildings. • Around 80% of the activity has come from 20% of LAs.

10. Shifting to a focus on growing business rates? • Retained business rates are increasingly important in both relative and absolute terms • But our studies in 2016 and 2017 found little evidence that LAs were changing their investment activity to drive BRR growth. • Position may have changed since then.

11. An increase in external borrowing – and risk? • Much of the new capital investment is funded by borrowing. • LAs’ stock of debt has increased by £16bn since 2012-13. • LAs’ cash holdings have increased by £5bn. • Both these developments carry risks for the sector.

12. Challenges to governance and accountability Demand and cost pressures Driving new behaviours and activities Creating a new decision making context in which local governance is being tested Risk profiles and risk appetites are higher More difficult decisions are being taken and more frequently Growth in sensitive and commercial decisions – transparency challenge A need for immediacy in decision making There is a need for new skills More complexity in LAs’ arrangements Significantly reduced resources for corporate support

13. Internal checks and balances - External auditors’ views • In general, core elements of local authorities’ governance arrangements are strong • But there is room for improvement in some LAs.

14. The role of external audit: The views of section 151 officers • Finance directors from some types of LA want a different focus and balance to the audit • Auditors work within the terms of the code set by the NAO and accounting and auditing standards set by CIPFA and the FRC

15. External audit: Section 151 officers’ views on scale fees in 2017-18 • Finance directors from some types of authority have also raised questions about whether audit fees are now too low

16. In conclusion • Government needs to come to a clear understanding of what local government is expected to do • The sector needs a long-term plan to secure its financial sustainability • Current national arrangements for understanding and monitoring governance and accountability risks need strengthening • There is a live debate on the role of external audit • Kingman implementation • Brydon review • MHCLG review of the audit regime under the Local Audit & Accountability Act • NAO’s current consultation on the Code of Audit Practice

17. Thank you Subscribe to notifications withNAO preference centre Follow the NAO on Twitter @NAOorguk All reports are available at www.nao.org.uk Please contact Alex Burfittwith any further questions Alex.burfitt@nao.org.uk View our blog www.nao.org.uk/naoblog Explore your authority at our interactive data www.nao.org.uk/highlights/financial-sustainability-of-local-authorities-2018-visualisation