Paul Dossett, partner and head of local government, Grant Thornton UK LLP, discusses financial sustainability and raises concerns about the medium-term viability of a number of councils.

In April of this year, we reviewed 92 auditors' annual reports (AARs) that we produced for our local government audited bodies, which represents approximately 30% of councils in England. AARs are the key annual deliverable relating to our value for money audit work. These AARs covered the audit year 2022/23, and thirty also covered 2021/22 due to joint reporting.

In all cases we looked at the financial position both in year and into the medium term. 2022/23 and 2023/24 were years where energy cost inflation and the cost-of-living crisis had a significant impact on council demand and consequently council finances. 2023/24 in particular was the year where, for the first time, well managed councils flagged that they were considering issuing section 114 reports. This was probably best captured by the Panorama programme on LB Havering.

We have considerable concerns about the medium-term viability of a number of councils. The key service areas that are buckling under the pressure include homelessness and children’s services, and for some councils adult social care remains a significant challenge.

Escalating weaknesses in financial sustainability arrangements

The reports in our review showed an escalating rate of significant weakness in councils’ financial sustainability arrangements. They also showed rising rates of significant weakness in arrangements for financial governance, internal control, performance management and procurement. In our view, this is due to a combination of the financial pressures some councils are facing and where there has been poor decision making and a weakening of often traditionally strong governance arrangements.

Common areas of weakness identified across the AARs reviewed were in relation to:

• savings and transformation plans and a lack of granularity

• management of the dedicated schools grant, in particular special education needs and disability (SEND) services, including escalating transport costs

• financial governance and internal control, sometimes linked to workforce issues and sometimes to the quality of scrutiny

• performance management and procurement which have taken a backward step at many authorities since the Covid 19 pandemic.

We have issued both statutory recommendations and key recommendations at a number of councils in the last year around financial sustainability issues. In addition, when we reviewed improvement recommendations raised in relation to the 2022/23 audit year, we found that almost half of them related to the same thematics as the key recommendations but to a lesser degree of concern. Left unaddressed, there's a risk that the improvement recommendations made at some councils could escalate to significant weaknesses in their arrangements by 2024/25.

The Housing Revenue Account

Another area of concern highlighted was around the Housing Revenue Account (HRA) and the considerable financial and operational pressures that many HRA’s are under. The legacy of Grenfell and high-profile cases involving damp and mould loom large and provide additional pressures which are not funded by formulaic inflation driven rent increases specified by Government. Councils across England who have responsibility for the HRA need to take a more strategic approach. Delaying capital investment in one year has led to increased needs for high-cost emergency repairs and maintenance work at some councils in the next year.

With new housing consumer standards being mandated from April 2024, any short-term savings in repairs and maintenance now could lead to very high costs in the future. Similarly, at some councils, savings on rent collection and landlord costs in one year have led to reduced income in another year. However, at other councils, digital landlord roles are now being successfully explored. Common improvement recommendations for the HRA in our AARs for 2022/23 were that councils should:

• maximise rental income where possible, within the statutory constraints that exist

• maintain strong financial and performance reporting on the HRA and ensure that the quality agenda is prioritised

• keep stock condition records and repairs activity registers up to date so that gaps can be identified accurately

• ensure that committee oversight is effective, for example, is the same committee cited on housing risks as on housing performance?

• explore efficiencies around the landlord role and drive down management costs.

Local government is facing challenging times with a new government seemingly willing to engage but no visible new funding yet on offer. Our recommendations, based on our analysis of an extensive portfolio of different types of local authorities, provide an opportunity to ensure that sound finance and governance underpins the sector in the years to come.