It’s no secret that local authorities are under severe financial pressure. With central government funding having halved since 2010, the pressure for councils to continue delivering local services on a shoestring budget is having a catastrophic effect on local government.
According to the National Audit Office’s most recent study into the financial sustainability of local authorities, Northamptonshire is just the tip of a worryingly large iceberg as a growing number of councils find themselves on the verge of financial crisis.
The recent plight of local authorities has been well documented. However, Northamptonshire County Council’s Section 114 Notice still came as a painful blow despite numerous warning signs that the authority was in trouble. Others have either been exhibiting signs of distress or baldly stating that they are in distress for some time.
Common to all distressed authorities has been the dwindling level of their ‘rainy day reserves’, in some cases presaged by ‘salami slicing’ of budgets and often accompanied by yawning pension fund deficits and significant maintenance backlogs. Historically, local authorities have been criticised by central government for holding high levels of reserves, although much was legally ring-fenced leaving little for a true ‘rainy day’. English authorities withdrew £1.4bn from reserves in 2017 (source: Office for Budget Responsibility). Whereas some withdrawals funded capital expenditure, the figure indicates it’s been raining for a long time now and the storm clouds continue to gather.
Dipping into ‘rainy day’ reserves to fund services is unsustainable. Reserves can only be spent once: a small sticking plaster over a gaping wound, ultimately doomed to fail. Due to austerity, services have been cut, yet demand is increasing, particularly for care services ranging from looked after children to older people’s services. More than half of the UK’s councils expect to overspend on adult social care alone this year, by an average of £21m (source: Office for Budget Responsibility).
As district councils and Northern Irish authorities do not provide adult social care, this suggests most upper tier authorities are significantly overspending. A combination of consistent overspends and dwindling reserves inevitably places a council on a fast track to financial ruin. Children’s services may well be a larger and more intractable problem.
In the case of Somerset County Council, its children’s services are a manifestation of its inability to balance its budget. Reserves have fallen 60% in the past five years as it struggles to cut expenditure in line with income. It is forecasting a £14.6m overspend on children’s services alone in 2018 and as a result, has agreed to close two thirds of its children’s centres in order to cut costs. Surrey County Council, which faces a £105m gap in its finances, has been drawing heavily on its reserves and has had persistent struggles in children’s services, with two adverse Ofsted reports.
Once a council is in distress or unable to balance its budget, these are desperate measures: a council in distress lacks the resources to reconfigure services as needed and lacks time to properly consult and explain its decisions, thus those outside the council inevitably see every service as a ‘sacred cow’. All councils want to do the right thing by their communities and do not take these decisions lightly, but the end result is hate and distrust from the very communities they serve.
However, given time and a proper understanding of the funding crisis and the decisions needed to maintain critical services, residents can and do accept cuts.
In the US, we saw this very situation in Pittsburgh, where the City’s credit rating was downgraded to ‘junk bond’ status and it was questionable whether or not the City could survive. As an independent, public sector-facing body, PFM worked in partnership with elected and appointed leaders, trade unions, businesses, citizen groups and other stakeholders to draft a multi-year recovery plan. In five years, the City drastically turned around its fortunes, ultimately turning its annual budget shortfalls into a $46.5m general fund surplus.
Local government needs a drastic reappraisal. At no time has any government sat down and determined what local government is for, how it should be structured and how it should be funded. Even today, the response to financial distress appears to be the creation of an ad-hoc patchwork of unitary authorities that cannot fully address the underlying financial issues. However, a fundamental reappraisal is not going to happen soon and it is not obvious local government is in line for funding increases.
The only option is take the tough long-term decisions that enable tangible, long-term stability and focus on the outcomes that matter most. Authorities must lay everything out on the table, take a long, hard look and determine the areas that can cut be back.
These will be tough, painful decisions to make – possibly harder than closing libraries or reducing refuse collections – that need the support of stakeholders. But in order to avoid further crises, we must really move the meter.
Christian Wall is director of local government at PFM UK
